QUESTION

ACC304   Accounting Theory

Assessment 1 (Case Study 1 Individual 30%)   T1 2012

Weight:                                  30% of final mark

Submission Due:                    Week 10 (22^nd May (Tuesday) 2012) at 5.30pm in class

Type:                                      Case study on identifying reporting entity SAC1

Reading Resources:             Chapter 6 (Week 4 resources)

Marking criteria:                   Answers are expected not to exceed 2000 words. Students are expected to demonstrate adequate understanding of the topics in the subject to which the assignment questions relate.

Details information regarding assessment (Case Study) is as follows:

OBJECTIVE

The assessment task has been designed to assess your understanding theory and practice of accounting.  The main purpose of the assessment is to provide students with the opportunity to consolidate and extend their understanding in connection with topic 4 of the subject.

REQUIREMENTS

1. Students are required to complete the assignment in individual.
2. Assessment should be submitted in hard copy with computer typed.
3. Assessment will not be accepted after 7days late.
4. Late submission penalty is 5% per day.

5. Your answering essay questions should not be more than 2000 words in length and should properly identify all the sources of material used in answering this assessment. Marks will be awarded for both content and presentation of your work. A marking worksheet is provided for consideration.

PRESENTATION

Essay presentation must include the followings:

• Cover page: showing your name, student number, the subject name, the subject code the essay topic, the date of submission and the word count of the essay.
• Contents
• Executive Summary
• Introduction
• Findings: answering of the questions of the case study.
• Conclusion
• List of references – an alphabetical listing of the works to which you have referred. The preferred referencing system is the author-date (Harvard) system. If you use material written by others, including other students or colleagues, it must be referenced. If it is not, you are plagiarising and this is a practice not tolerated at Carrick.

PLAGIARISM

Taking another person’s ideas, words or inventions and presenting them as your own without acknowledging your sources (citing or referencing), is plagiarism. Paraphrasing or rewording another person’s work, without acknowledging its source, is also plagiarism. If you are identified with plagiarism assessment mark will be zero.

REFERENCING

Correct referencing is important for two main reasons. The first is to enable the reader to access source material you have relied upon, should they care to. The other is to ensure that you have properly recognized the contribution of the work of others to your assignment. If you do not do this properly, you are engaging in plagiarism—the theft, intentional or otherwise, of the intellectual or creative work of others.

Carrick will not tolerate plagiarism. It is therefore important that you understand how to avoid it It is important that you adopt a consistent, and adequate, referencing system. The one most widely is Harvard) system.

You may also discuss referencing with your lecturer and also there is referencing supporting materials in the Carrick library.

Case Study QUESTIONS

Case Studies 

Case 1

Beta Pty Ltd is a small proprietary company. The five members of the board of directors own 80% of the ordinary shares. The remaining 20% of the shares are owned by family members of the directors. The company has twenty employees who have worked for the company for a number of years. The company has bank borrowings of $1,500,000 and has six major suppliers.

Small proprietary company
A proprietary is defined as small for a financial year if it satisfies at least two of the following paragraphs:

• the consolidated revenue for the financial year of the company and any entities it controls is less than $25 million
• the value of the consolidated gross assets at the end of the financial year of the company and any entities it controls is less than $12.5 million, and
• the company and any entities it controls have fewer than 50 employees at the end of the financial year.

Some small proprietary companies may have to lodge financial reports in certain circumstances

Is Beta Ltd a reporting entity? Give reasons for your answer.

Case 2

Gamma Manufacturing Pty Ltd is a proprietary company with seven shareholders, each of whom is involved in its day-to-day operations. Gamma is an after market automotive accessories producer and distributor, but it also has some investments in other industries. Gamma dominates the off road accessory market in Western Australia and Queensland and is expanding its operations into other states as its resources permit. The company employs 120 people and has sales of $17.5 million. Its only major creditor is a syndicate of banks to whom it owes $2.5 million.

Is Gamma Manufacturing Pty Ltd a reporting entity in accordance with the provisions of SAC1 ‘Definition of the Reporting Entity’? Give reasons for your answer.

Case 3

Terrafirma Ltd is a mining company with seven directors who own all the share capital and are all involved in management of the company. It has about 650 employees 0n site at its operation in the Northern Territory. It has one major creditor, Macquarie Bank Ltd. It is one of two firms in Australia mining and refining rare earth minerals used in advanced electronics manufacturing, much of which is used within the defence sector.

Is Terrafirma Ltd a reporting entity in accordance with the provisions of SAC1? Give reasons your answer.

Marking Criteria Format

SOLUTION

Executive Summary

The concept of reporting entity revolves around the users who look forward for information provided by an entity in their financial reports and then takes decisions related to allocation of resources. Employees of a company, suppliers, financial institutions, investors and Government agencies are some examples of the users of financial reports by an entity. The purpose of this essay is to understand the concept of ‘reporting entity’. The case studies discussed in the assessment provides a crystal clear knowledge of the concept.

Contents

1.      Introduction. 5

2.      Case 1. 5

3.      Case 2. 6

4.      Case 3. 7

5.      Conclusion. 9

References. 11

1.    Introduction

An entity is identified as a ‘reporting entity’ or a ‘non reporting entity’ on the basis of the need for information of users of financial reports. The factors pointed out in SAC1, paras 20 to 22 are considered primary factors that determines whether the said entity is a reporting entity or not.

2.    Case 1

According to the SAC1, a business, government department or agency, company or other organisation is considered a reporting entity if there exist users of financial reports and the user are dependent on the financial reports for information to take any kind of decisions regarding the appropriation of their scanty sources. SAC1 is concerned about the people related with an entity and is aimed at making sure that adequate and appropriate information are provided to them. Thus the scope of definition is not limited to only certain types of businesses or companies. The nature of the organisation does not hold any significance in case there are people whose decisions are based on these reports. For example, information regarding income and profit of an entity is needed by shareholders to take decisions related to investments. Information regarding government spending is required by citizens and community to budget and plan their future activities. SAC1 also requires company reports to comply with the Statements of Accounting Concepts and Accounting Standards.

Following characteristics are likely to make an entity a ‘reporting entity’ which will have users whose decisions will depend on information provided by an entity’:

If an entity has separate management and separate ownership: The chances of having more users of information provided by an entity are more if the level of separation between management and ownership of an entity is more. In this case, though the entity is owned by shareholders but the decisions on behalf of an entity are taken either by the management or board of directors. Shareholder are not associated witht he day-to-day management decisions of an entity and in case they intend to take any decision regarding their investment in the company then they will need company reports to access information about the company.

Entity which has substantial economic and political impact: Activities of certain entities have their impact on community, society in which they operate and regulatory environment which they follow. Thus there are tend to have user who would like to have information about such entity. The operational reports will be only source of information for these users to make any kind of decisions related to finance. Unions, employer associations, large national companies and government regulatory bodies are examples.

Financial characteristics: Financial characteristics like the employees count, the value of assets that entity control, income level, value of liabilities etc. also determines whether an entity is a reporting entity or not. In case the level of financial features of an entity are too much chances are that more and more people will need information through reports to monitor and review operations of an entity.

Beta Pvt. Ltd. is a small proprietary company with just five members as its board of directors. Moreover they own 80% of the ordinary shares. In fact the remaining 20% of the shares are owned by family members of the directors only. The company has just twenty employees. The company has bank borrowings of $1.5 million which is a very small liability and has six major suppliers. Thus company’s management and ownership are not separate. As far as financial characteristics are concerned, number of employees and liability, they are also not very significant. Thus, Beta Pvt. Ltd. Is not likely to fall in the category of Reporting Entity.

3.    Case 2

According to the SAC1, a business, government department or agency, company or other organisation is considered a reporting entity if there exist users of financial reports and the user are dependent on the financial reports for information to take any kind of decisions regarding the appropriation of their scanty sources. SAC1 is concerned about the people related with an entity and is aimed at making sure that adequate and appropriate information are provided to them. Thus the scope of definition is not limited to only certain types of businesses or companies. The nature of the organisation does not hold any significance in case there are people whose decisions are based on these reports. For example, information regarding income and profit of an entity is needed by shareholders to take decisions related to investments. Information regarding government spending is required by citizens and community to budget and plan their future activities. SAC1 also requires company reports to comply with the Statements of Accounting Concepts and Accounting Standards.

Following characteristics are likely to make an entity a ‘reporting entity’ which will have users whose decisions will depend on information provided by an entity’:

If an entity has separate management and separate ownership: The chances of having more users of information provided by an entity are more if the level of separation between management and ownership of an entity is more. In this case, though the entity is owned by shareholders but the decisions on behalf of an entity are taken either by the management or board of directors. Shareholder are not associated witht he day-to-day management decisions of an entity and in case they intend to take any decision regarding their investment in the company then they will need company reports to access information about the company.

Entity which has substantial economic and political impact: Activities of certain entities have their impact on community, society in which they operate and regulatory environment which they follow. Thus there are tend to have user who would like to have information about such entity. The operational reports will be only source of information for these users to make any kind of decisions related to finance. Unions, employer associations, large national companies and government regulatory bodies are examples.

Financial characteristics: Financial characteristics like the employees count, the value of assets that entity control, income level, value of liabilities etc. also determines whether an entity is a reporting entity or not. In case the level of financial features of an entity are too much chances are that more and more people will need information through reports to monitor and review operations of an entity.

In case of Gamma Manufacturing Pvt. Ltd.; though the ownership and management are almost same but as far as its financial and economic characteristics are concerned they are quite significant. The company has investments in other industries, it dominates the off road accessory market in Western Australia and Queensland and is expanding its operations, the company employs 120 people and has sales of $17.5 million and most importantly syndicate of a bank is its creditor. Furnishing adequate and appropriate information for these users is quite essential. Thus Gamma Manufacturing Pvt. Ltd is a reporting entity in accordance with the provisions of SAC1

4.    Case 3

According to the SAC1, a business, government department or agency, company or other organisation is considered a reporting entity if there exist users of financial reports and the user are dependent on the financial reports for information to take any kind of decisions regarding the appropriation of their scanty sources. SAC1 is concerned about the people related with an entity and is aimed at making sure that adequate and appropriate information are provided to them. Thus the scope of definition is not limited to only certain types of businesses or companies. The nature of the organisation does not hold any significance in case there are people whose decisions are based on these reports. For example, information regarding income and profit of an entity is needed by shareholders to take decisions related to investments. Information regarding government spending is required by citizens and community to budget and plan their future activities. SAC1 also requires company reports to comply with the Statements of Accounting Concepts and Accounting Standards.

Following characteristics are likely to make an entity a ‘reporting entity’ which will have users whose decisions will depend on information provided by an entity’:

If an entity has separate management and separate ownership: The chances of having more users of information provided by an entity are more if the level of separation between management and ownership of an entity is more. In this case, though the entity is owned by shareholders but the decisions on behalf of an entity are taken either by the management or board of directors. Shareholder are not associated witht he day-to-day management decisions of an entity and in case they intend to take any decision regarding their investment in the company then they will need company reports to access information about the company.

Entity which has substantial economic and political impact: Activities of certain entities have their impact on community, society in which they operate and regulatory environment which they follow. Thus there are tend to have user who would like to have information about such entity. The operational reports will be only source of information for these users to make any kind of decisions related to finance. Unions, employer associations, large national companies and government regulatory bodies are examples.

Financial characteristics: Financial characteristics like the employees count, the value of assets that entity control, income level, value of liabilities etc. also determines whether an entity is a reporting entity or not. In case the level of financial features of an entity are too much chances are that more and more people will need information through reports to monitor and review operations of an entity.

Terrafirma Ltd is a mining company, thus it has a great economic, political and social impact. It has about 650 employees, again the financial characteristics are quite significant.  Macquarie Bank Ltd.is company’s major creditor. Company’s products are used in defence. Thus company has a substantial social impact. Terrafirma Ltd  is a reporting entity in accordance with the provisions of SAC1

5.    Conclusion

SAC 1 Definition of the reporting entities para 41 states that ‘Reporting entities shall prepare general purposes financial reports. Such reports shall be prepared in accordance with statement of Accounting Concepts and Accounting Standards”.

References

The Australian Accounting Research Foundation. Definition of the Reporting Entity. [online]. Available at: < www.aasb.gov.au/admin/file/content102/c3/SAC1_8-90_2001V.pdf> [Accessed 22 May 2012].

Australian Accounting Research Foundation, 2010. Conceptual Framework: The Reporting Entity. [pdf] Australia: Australian Accounting Research Foundation. Available at: < http://www.aasb.gov.au/admin/file/content102/c3/June_10_Agenda_paper_10_2_Staff_Paper_Conceptual_Framework_Reporting_Entity.pdf > [Accessed 22 May 2012].

Accounting & Finance. The conceptual framework in Australia. [online] Available at: < http://www.westone.wa.gov.au/k-12lrcd/learning_areas/accounting_finance/AF3B/content/001_concepts_regulations/page_02.htm> [Accessed 22 May 2012].

Grand Thornton, 2009. Financial Reporting Requirements. [online] Available at: < http://www.grantthornton.co.nz/Assets/documents/Services/ifrs/financial-reporting-requirements-for-australian-entities.pdf> [Accessed 22 May 2012].

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