chapter 9 governance and other information. powerpoint slides t/a accounting: what the numbers mean...
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CHAPTER 9Governance and Other
Information
PowerPoint Slides t/a Accounting: What the Numbers MeanMarshall, McCartney, van Rhyn, McManus, VieleSlides prepared by Sandra Chapple Copyright 2005 McGraw-Hill Australia Pty Ltd
9-2
• Corporate governance• HIH Royal Commission• ASX principles of good corporate governance• CLERP• Financial reporting misstatements• Independent auditor’s report• Reporting requirements• Explanatory notes to the financial statements• Management discussion and analysis• Five-year summary of financial data
Overview
PowerPoint Slides t/a Accounting: What the Numbers MeanMarshall, McCartney, van Rhyn, McManus, VieleSlides prepared by Sandra Chapple Copyright 2005 McGraw-Hill Australia Pty Ltd
9-3
Corporate GovernanceAbility of a company to:
Self-controlSelf-control Self-regulateSelf-regulate
Fully disclose information to the market place and to investors
Fully disclose information to the market place and to investors
This may include boardroom behaviour of directors, and strategies and actions of the
company, directors, managers and employees.
PowerPoint Slides t/a Accounting: What the Numbers MeanMarshall, McCartney, van Rhyn, McManus, VieleSlides prepared by Sandra Chapple Copyright 2005 McGraw-Hill Australia Pty Ltd
9-4
Corporate Governance
Recent focus on corporate governance due to high level of
corporate collapses in the late 1980s,
1990s and again in the early 2000s.
Corporate collapses:
• HIH
• Harris Scarfe
• One.Tel
• Ansett Airlines
PowerPoint Slides t/a Accounting: What the Numbers MeanMarshall, McCartney, van Rhyn, McManus, VieleSlides prepared by Sandra Chapple Copyright 2005 McGraw-Hill Australia Pty Ltd
9-5
Corporate Governance
Failure of corporate governance in recent years has led to a series of government and non- government reports and legislation.
HIH Royal Commission
CLERP
ASX Principles of Good Corporate
Governance
PowerPoint Slides t/a Accounting: What the Numbers MeanMarshall, McCartney, van Rhyn, McManus, VieleSlides prepared by Sandra Chapple Copyright 2005 McGraw-Hill Australia Pty Ltd
9-6
Corporate Governance
• Focus on issues relating to the management of the organisation and boardroom culture
• Did not recommend legislative changes (imposition of governance systems or structures is fraught with danger)
HIH Royal Commission
PowerPoint Slides t/a Accounting: What the Numbers MeanMarshall, McCartney, van Rhyn, McManus, VieleSlides prepared by Sandra Chapple Copyright 2005 McGraw-Hill Australia Pty Ltd
9-7
Corporate Governance
• More regulated and focused on confirming non-
compliance with a list of best governance practices.
• Compliance not mandatory but top 500 companies
must report on the extent of their compliance with the
recommendations.
ASX Principles of Good Corporate Governance
PowerPoint Slides t/a Accounting: What the Numbers MeanMarshall, McCartney, van Rhyn, McManus, VieleSlides prepared by Sandra Chapple Copyright 2005 McGraw-Hill Australia Pty Ltd
9-8
Corporate Governance
1. Lay solid foundations for management and oversight.
2. Structure the board to add value.
3. Promote ethical and responsible decision-making.
4. Safeguard integrity in financial reporting.
5. Make timely and balanced disclosure of all material matters.
ASX Principles of Good Corporate Governance
PowerPoint Slides t/a Accounting: What the Numbers MeanMarshall, McCartney, van Rhyn, McManus, VieleSlides prepared by Sandra Chapple Copyright 2005 McGraw-Hill Australia Pty Ltd
9-9
Corporate Governance
6. Respect the rights of shareholders.
7. Recognise and manage risk.
8. Encourage enhanced performance.
9. Remunerate fairly and responsibly.
10. Recognise the legitimate interests of stakeholders.
ASX Principles of Good Corporate Governance
PowerPoint Slides t/a Accounting: What the Numbers MeanMarshall, McCartney, van Rhyn, McManus, VieleSlides prepared by Sandra Chapple Copyright 2005 McGraw-Hill Australia Pty Ltd
9-10
Corporate Governance
Corporate Law Economic Reform Program
Legislative changes were not significant.
CLERP 9 gives ASIC (Australian Securities and
Investments Commission) the power to penalise and
fine companies (to $100,000) for breaches of the
disclosure rules.
CLERP
PowerPoint Slides t/a Accounting: What the Numbers MeanMarshall, McCartney, van Rhyn, McManus, VieleSlides prepared by Sandra Chapple Copyright 2005 McGraw-Hill Australia Pty Ltd
9-11
Financial Reporting MisstatementsWhat is going on?
Seven financial shenanigans:
1. Recording revenue too soon or of questionable quality.
2. Recording bogus revenue.
3. Boosting income with one-time gains.
4. Shifting current expenses to a later period.
5. Failing to record or improperly reducing liabilities.
6. Shifting current revenue to a later period.
7. Shifting future expenses to the current period as a special charge.
Behaviours contrary to
GAAPS
PowerPoint Slides t/a Accounting: What the Numbers MeanMarshall, McCartney, van Rhyn, McManus, VieleSlides prepared by Sandra Chapple Copyright 2005 McGraw-Hill Australia Pty Ltd
9-12
Other Information
To provide full disclosure about companies
• Independent auditor’s report
• Explanatory notes to the financial statements
• Management discussion and analysis
• Five-year summary of financial data
PowerPoint Slides t/a Accounting: What the Numbers MeanMarshall, McCartney, van Rhyn, McManus, VieleSlides prepared by Sandra Chapple Copyright 2005 McGraw-Hill Australia Pty Ltd
9-13
Independent Auditor’s Report
• Addressed to members of the company
• Confirms fair presentation of the financial statements
• One component that can be relied upon to provide
unbiased information to shareholders
• Three elements
PowerPoint Slides t/a Accounting: What the Numbers MeanMarshall, McCartney, van Rhyn, McManus, VieleSlides prepared by Sandra Chapple Copyright 2005 McGraw-Hill Australia Pty Ltd
9-14
Independent Auditor’s Report
1. Identity of reports being audited:
• income statement
• balance sheet
• statement of cash flows
• accompanying notes
• director’s declaration
1. Identity of reports being audited:
• income statement
• balance sheet
• statement of cash flows
• accompanying notes
• director’s declaration
PowerPoint Slides t/a Accounting: What the Numbers MeanMarshall, McCartney, van Rhyn, McManus, VieleSlides prepared by Sandra Chapple Copyright 2005 McGraw-Hill Australia Pty Ltd
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Independent Auditor’s Report
2. Scope: nature and extent of auditor’s work
• reasonable assurance on whether the financial statements are free from material misstatements
• no guarantee that they are free from fraudulent transactions or from the effects of errors
• audit work involves tests.
2. Scope: nature and extent of auditor’s work
• reasonable assurance on whether the financial statements are free from material misstatements
• no guarantee that they are free from fraudulent transactions or from the effects of errors
• audit work involves tests.
PowerPoint Slides t/a Accounting: What the Numbers MeanMarshall, McCartney, van Rhyn, McManus, VieleSlides prepared by Sandra Chapple Copyright 2005 McGraw-Hill Australia Pty Ltd
9-16
Independent Auditor’s Report
3. Opinion:
That the financial statements are
presented fairly and are in accordance
with accounting standards and other
mandatory professional reporting and
statutory requirements.
3. Opinion:
That the financial statements are
presented fairly and are in accordance
with accounting standards and other
mandatory professional reporting and
statutory requirements.
PowerPoint Slides t/a Accounting: What the Numbers MeanMarshall, McCartney, van Rhyn, McManus, VieleSlides prepared by Sandra Chapple Copyright 2005 McGraw-Hill Australia Pty Ltd
9-17
Reporting Requirements
The requirement to prepare financial reports and
disclose information through the content of financial
reports is determined by the classification of the
company.
The requirement to prepare financial reports and
disclose information through the content of financial
reports is determined by the classification of the
company.
PROPRIETARY COMPANY
Large Pty Company
Small Pty Company
PUBLIC COMPANY
Listed on the stock exchange
PowerPoint Slides t/a Accounting: What the Numbers MeanMarshall, McCartney, van Rhyn, McManus, VieleSlides prepared by Sandra Chapple Copyright 2005 McGraw-Hill Australia Pty Ltd
9-18
Reporting Requirements
Small Pty CompanyA proprietary company is small if it satisfies at least two of the following criteria:
1. Consolidated gross revenue for the financial year is less than $10 million.
2. Consolidated gross assets at the end of the financial year are less than $5 million.
3. The consolidated group has fewer than the equivalent of 50 full-time employees at the end of the financial year.
PowerPoint Slides t/a Accounting: What the Numbers MeanMarshall, McCartney, van Rhyn, McManus, VieleSlides prepared by Sandra Chapple Copyright 2005 McGraw-Hill Australia Pty Ltd
9-19
Reporting Requirements
Small Pty Company
Does not have to prepare an
annual financial report or have it
audited in accordance with the
Corporations Act 2001.
If the proprietary company is not a small company then it will be classified as large.
PowerPoint Slides t/a Accounting: What the Numbers MeanMarshall, McCartney, van Rhyn, McManus, VieleSlides prepared by Sandra Chapple Copyright 2005 McGraw-Hill Australia Pty Ltd
9-20
Reporting Requirements
Public CompanyLarge Pty Company
• must prepare an annual financial report, have itaudited, and lodge it with the Australian Securities and Investments Commission (ASIC)
• other documents must be lodged with ASIC.
• The complete financial report, a full financial report and a concise report,
• The directors’ report, and
• The auditor’s report on the financial report
• The complete financial report, a full financial report and a concise report,
• The directors’ report, and
• The auditor’s report on the financial report
and
• must also comply with reporting requirements of the ASX
• must also comply with reporting requirements of the ASX
PowerPoint Slides t/a Accounting: What the Numbers MeanMarshall, McCartney, van Rhyn, McManus, VieleSlides prepared by Sandra Chapple Copyright 2005 McGraw-Hill Australia Pty Ltd
9-21
Annual report
Reporting Requirements
Full financial report
• an income statement
• a balance sheet
• a statement of cash flows
• the director’s report
• a statement by the auditor
• a statement that the report is a concise report
Concise financial report
must contain:
sometimes called:
PowerPoint Slides t/a Accounting: What the Numbers MeanMarshall, McCartney, van Rhyn, McManus, VieleSlides prepared by Sandra Chapple Copyright 2005 McGraw-Hill Australia Pty Ltd
9-22
Explanatory Notes to the Financial Statements
Important for full understanding and interpretation of the financial statements.
The notes disclose details of specific financial statement items.
Presented in the same sequence as in the financial statements.
PowerPoint Slides t/a Accounting: What the Numbers MeanMarshall, McCartney, van Rhyn, McManus, VieleSlides prepared by Sandra Chapple Copyright 2005 McGraw-Hill Australia Pty Ltd
9-23
Explanatory Notes
Significant accounting policies:
• Disclosure of the specific practices being followed by the firm
• To ensure information is comparable and understandable
• Reference to accounting standards or other pronouncements
PowerPoint Slides t/a Accounting: What the Numbers MeanMarshall, McCartney, van Rhyn, McManus, VieleSlides prepared by Sandra Chapple Copyright 2005 McGraw-Hill Australia Pty Ltd
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Explanatory Notes
Share options and share purchase plans:
• Plans whereby officers and key employees are given an option to buy shares at some time in the future, at a price equal to the market price of the shares when the option is granted
• Incentives to increase the profitability of the firm so that the share price will rise
• Details must be disclosed
PowerPoint Slides t/a Accounting: What the Numbers MeanMarshall, McCartney, van Rhyn, McManus, VieleSlides prepared by Sandra Chapple Copyright 2005 McGraw-Hill Australia Pty Ltd
9-25
Explanatory Notes
Changes to accounting principles:
• Changes that have a material effect on the comparability of the current period financial statements with those of prior periods
• Adoption of International accounting standards from 1/1/05 will mean that all companies will face changes in their accounting policies
• Disclose effects
PowerPoint Slides t/a Accounting: What the Numbers MeanMarshall, McCartney, van Rhyn, McManus, VieleSlides prepared by Sandra Chapple Copyright 2005 McGraw-Hill Australia Pty Ltd
9-26
Explanatory Notes
Business combinations:
• Mergers, acquisitions, dispositions or demergers
• Description of transaction and effect on financial statements
PowerPoint Slides t/a Accounting: What the Numbers MeanMarshall, McCartney, van Rhyn, McManus, VieleSlides prepared by Sandra Chapple Copyright 2005 McGraw-Hill Australia Pty Ltd
9-27
Explanatory Notes
Contingencies and commitments:
• Most of these will have a negative impact on the financial statements if they materialise
• Results not known
• Full disclosure (e.g. pending legal action, firm acts as a guarantor of the indebtedness of another entity)
PowerPoint Slides t/a Accounting: What the Numbers MeanMarshall, McCartney, van Rhyn, McManus, VieleSlides prepared by Sandra Chapple Copyright 2005 McGraw-Hill Australia Pty Ltd
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Explanatory Notes
Events subsequent to balance date:
• If an event has a significant effect on the balance sheet or income statement, an explanation must be provided (e.g. sale of a significant part of the company’s assets).
PowerPoint Slides t/a Accounting: What the Numbers MeanMarshall, McCartney, van Rhyn, McManus, VieleSlides prepared by Sandra Chapple Copyright 2005 McGraw-Hill Australia Pty Ltd
9-29
Explanatory Notes
Segment information:
• Segments may reflect different lines of business or different geographical areas
• Disclosure of business segments and related information permits judgements about the impact of factors on specific sectors
PowerPoint Slides t/a Accounting: What the Numbers MeanMarshall, McCartney, van Rhyn, McManus, VieleSlides prepared by Sandra Chapple Copyright 2005 McGraw-Hill Australia Pty Ltd
9-30
Management Discussion and Analysis
Many annual reports include Many annual reports include a narrative section by a narrative section by
management.management.
• Description of the firm’s activities for the year
• Comments about the firm’s financial condition and
results of operations
• Not included in the scope of the independent
auditor’s report
PowerPoint Slides t/a Accounting: What the Numbers MeanMarshall, McCartney, van Rhyn, McManus, VieleSlides prepared by Sandra Chapple Copyright 2005 McGraw-Hill Australia Pty Ltd
9-31
Five-year summary of financial data
• Key income statement data
• Significant ratios
• Earnings and dividends per share
• Average number of shares outstanding
• Other operating statistics
• Year end data from balance sheet
• Year end market price of ordinary shares
This summary is not included in the scope of the independent auditor’s report.