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Australian Accounting Standards

Categories Accounting, Australia

Essay, Pages 5 (1078 words)

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Essay, Pages 5 (1078 words)

Introduction The Australian Accounting Standards Board (2013) makes the Australian Accounting Standards, including Interpretations. The neutral Standards was adopted when AASB merged with Public Sector Accounting Standards Board and it is now to be applied to all types of entities that are required to prepare financial reports by the Corporations Act 2011, the General Government Sector (GGS) and entities in the for-profit or not-for-profit private or public sectors that are reporting entities.

However when the first standards came out it was applied to for-profit organisations only.

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Today, most standards still focus on business entities that make government and not-for-profit entities unable to meaningfully apply the same set of standards as do business entities for many different reasons. Some of the reasons are: different purposes, objectives and mission, budget and accounting for assets. Some of the Issues Government, not-for-profit and business entities have a vastly different purposes and objectives.

A government entity is defined by the Australian Business Register (2013), as an organisation that is established by the Commonwealth, a State or a Territory (whether under a law or not) to carry on an enterprise or established for a public purpose by an Australian law.

While, Chang & Tuckman (1994) describes notfor-profit entity as a form of entity that does not operates for profits, all of the income of a not-for-profit entity is used to persuade the entity’s objectives.

On the other hand, business entity is also known as for-profit entity and as the name says, its main objective is to generate profit for its owners, investors and shareholders.

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The main objective of financial reporting is to provide information about the entity’s performance (Granof ; Wardlow, 2011) by providing its income, expenses, profit, asset, liability and equity. However, because of the different purpose and objectives of Government, Not-for-Profit and Business entities, as outlined above, it is not necessarily the best approach for all types of organisations.

Accounting and reporting for business entities are more concerned in what way it is possible to maximise its profit and/or cash flow. Whilst, government and not-forprofit can provide information about its revenue, expenditure, assets and etc. and maybe make a profit or loss, it is not necessarily the correct way to measure its performance. The performance of a government or a not-for-profit entity is best measured with non-financial records linked to the organisation’s mission statement. In Australia, there is a standard that guides the government sector to prepare its financial reporting, the AASB 1049.

Budget is a preliminary prediction for what to expect in the next financial period. It is important for business entities, as it can help management to establish its goals towards revenue and monitor its expenses, without one business may run the risk of spending more than it is predicting to make or not spending adequate to grow the entity and compete in the marketplace. Government and not-for-profit are not governed by the marketplace like for-profit business; they are controlled by their budgets. Their revenue and expenditure are regulated over the budgetary method.

Moglia (2011), states that government’s revenues may be determined by legislature, so they aren’t subject to competition like in for-profit and not-for-profit revenues aren’t established by legal mandate, but are obtained from contributions, dues, tuition, or user charges, unlike the sales of a business. Due to its nature, government and not-for-profit budgets are very important because they are the result of the political course of action and include and control the valuable decisions of these entities.

The government and not-for-profit entities budget determines the entity’s income and expenditure, which activities are back up and which are appraised, it is used to guide and to oversee spending. Most importantly, the budget is used as a monitor and can complement the accounting and reporting system in guiding if its target of income is met and if over-spending had occurred or if it is closed to. The AASB framework paragraph 22, states that financial statements are to be prepared on the accrual basis accounting, therefore budgets needs to be prepared on the same basis.

At the moment in Australia, businesses, public sector agencies and even state governments use the accrual method and it might surprise many to learn that the Commonwealth government uses cash accounting in calculating its budget bottom line and this can be very problematic (Goutzamanis, 2013). Goutzamanis also pointed out that if the 2012-13 budget had used accrual accounting it would have recorded a $202 million “net operating balance” deficit – not a $1. 5 billion surplus. Any entity has a need for assets to be able to function.

Accounting for capital assets can be very different for business and government ; not-for-profit entities. One of the reasons that business invests in capital assets, is to benefit its operational capacity and as a consequence improve its profitability. Government and not-forprofit organisation capital assets can be challenging to account for, as some initial costs may not be available due to the age of the asset, the value does not have a transcend financial quantification or the asset are held to deliver services at no cost.

Therefore, their assets normally do not generate revenue and are more likely to be a liability as government deliver services normally at no cost and have expenses to maintain its assets as an example, road. There is a specific standard for government that’s called land under roads (AASB 1051) that deals with this type of issues. Conclusion There are different reasons that the same set of accounting standards would not suit all types of organisations. The differences are extensive as the government, not-for-profit and for-profit entities have different purposes, objectives and mission.

The government and not-for-profit organisations are mainly governed by budgets and not by the marketplace. AASB 1049 – Whole of Government and general government sector financial reporting – as per paragraph 1, AASB 1049 has the objective of provide the government with: (a) Information about the stewardship and accountability for the resources entrusted; (b) Information about the financial position, performance and cash flow; and (c) Information that facilitates assessment of the macro-economic impact of each government and sectors.

The Australian Accounting Standards Board have a difficult task to have a single set of standards that will be meaningful for government and not-for-profit entities as they are to business entities. The Board is always looking for improvement of the standards, as example, at the moment they are working towards a creation of a new standard – Disclosures by Private Sector Not-For-Profit Entities.

Cite this essay

Australian Accounting Standards. (2020, Jun 02). Retrieved from https://studymoose.com/australian-accounting-standards-2-new-essay

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