CHAPTER 9 Governance and Other Information. PowerPoint Slides t/a Accounting: What the Numbers Mean Marshall, McCartney, van Rhyn, McManus, Viele Slides

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

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• 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


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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.


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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


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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


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• 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


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• 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


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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.



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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.



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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


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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


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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


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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


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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


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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.


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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.


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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


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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.


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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.


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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


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Annual report


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:


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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.


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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


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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


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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


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Explanatory Notes

Business combinations:

• Mergers, acquisitions, dispositions or demergers

• Description of transaction and effect on financial statements


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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)


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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).


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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


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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


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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.

Documents

CHAPTER 9 Governance and Other Information. PowerPoint Slides t/a Accounting: What the Numbers Mean Marshall, McCartney, van Rhyn, McManus, Viele Slides