1. Chapter 1 Nature and regulation of companies Prepared by Mark Vallely
Notes marked in blue contain additional info to be inserted into the slides (if possible) – otherwise left as notes for lecturers

2. Learning objectives
Summarise the nature and attributes of a company (p. 2)
Discuss the different types of companies which may be formed under the Corporations Act (p. 3)
Describe the necessary documentation for forming a company (p. 7)
Describe the types of records needed to manage a company (p. 9)
Compare and contrast shares and debentures, and discuss the reasons for issuing disclosure documents (p. 9)
Discuss the background and purpose of the Corporations Act 2001 by which companies are formed, administered and dissolved (p. 12)
Evaluate the reasons for the development of accounting standards and describe the current arrangements for establishing accounting standards in Australia, subject to global influences in the standard-setting process (p. 14)
Discuss the roles played by the Australian Securities and Investments Commission (ASIC) and the Australian Securities Exchange Limited (ASX) (p. 25)
Analyse the concepts of general purpose financial reporting and the reporting entity (p. 26)
Describe the current differential reporting requirements (p. 28).

3. 2 million companies in Australia
Nature of a company
A company is a legal entity
Incorporated via registration by Australian Securities and Investments Commission (ASIC)
Subject to requirements of Corporations Act 2001
A company has:
the advantage of limited liability (Note1)
separate legal existence from its members
the legal powers of a natural person
financing advantages
the right to own assets and enter contracts
the right to sue and be sued
2 million companies in Australia
(ASIC 2012)
LO1: Summarise the nature and attributes of a company (p. 2)
Note 1: Limited liability refers to the fact that the shareholders of the company are liable only to the extent of any amounts unpaid on their shares in the event of the winding up of the company. Contrast this to a partnership, where the partners are jointly and severally liable for all partnership debts.
Separate legal existence – a company has continuity advantages over partnerships
– a company is unaffected by the death or bankruptcy of a member
– members can sell their shares at any time

4. Proprietary companies
Most common type of company “Proprietary company” (Note1)
Limited by Shares (Pty Ltd)
Unlimited with a share capital (Pty)
Proprietary companies
Must have a share capital (limited by shares or unlimited)
Minimum of 1 member, maximum of 50
Minimum of 1 director
Cannot raise funds from the public
Classified as large or small (see next slide for further discussion)
LO2: Discuss the different types of companies which may be formed under the Corporations Act 2001 (p. 3 – 6)
Note 1: A proprietary company
Must have a share capital
With limited liability (XYZ Pty Ltd) or
With unlimited liability (ABC Pty)

5. Large / small test
Proprietary companies – classify as large or small for reporting purposes
Small proprietary companies must satisfy at least two of the following criteria:
Annual gross operating revenue: < $25 million
Gross assets: < $12.5 million
Number of employees: < 50
Entities that do not satisfy the criteria for classification as a small proprietary company are classified as large (Note 1)
Note 1:
Small proprietary companies
are not required to prepare formal financial statements
or have them audited
must maintain sufficient records to allow financial statements to be prepared and audited if required
if financial reports are prepared they do not have to comply with accounting standard requirements
Large proprietary companies
must prepare formal financial statements
in accordance with accounting standards
have them audited and
provide a copy to shareholders and ASIC

6. Public companies
A public company is one that is not a proprietary company (Note 1)
Limited by Shares
Unlimited with a share capital
Limited by guarantee
No Liability (see next slide)
A public company:
Can invite public to subscribe for securities
Can list on Australian Securities Exchange (ASX)
Minimum 1 member, no maximum
Minimum of 3 directors
Must prepare / publish audited financial statements (Note 2)
Note 1: A public company
can be limited by shares or unlimited with a share capital (just like a proprietary company)
but is not required to have share capital and may be limited by guarantee (Not for Profit Organiation)
This means that members agree/guarantee to contribute a certain amount in the event of liquidation
However, most public companies are limited with a share capital
Unlimited with a share capital (if business is formed based on partnership like accounting legal firms)
Note 2: Financial statements must be prepared in accordance with Accounting standards and regulations

7. Other titles for companies
Listed corporations
Public companies listed on the ASX
Disclosing entities
An entity with enhanced disclosure (ED) securities (Note 1)
Foreign companies
Incorporated outside of Australia or
in an external territory of Australia
No-liability companies
XYZ NL
Sole object of the company must be mining
Shareholders are not liable for calls on shares or debts of the company
Note 1: An entity which has issued ‘enhanced disclosure’ securities
A disclosing entity is one which
Has its shares listed on the ASX (so a public company listed on the ASX is a disclosing entity)
Is issuing securities via a disclosure document (e.g. prospectus), under a compromise or scheme of arrangement
Is offering its securities as part of a takeover scheme
Is a borrower who has issued debentures
Disclosing entities must prepare
Audited
Half-yearly and annual financial reports
In accordance with accounting standards and
Are subject to continuous disclosure requirements

8. Forming a company
To register a company, a person lodges the prescribed application form with ASIC
On acceptance of the application ASIC will:
Allocate an ACN (Australian Company Number)
Register the company
Issue a certificate of registration
A company legally comes into existence on the date recorded on this certificate
LO3: Describe the necessary documentation for forming a company (p. 7 – 8)

9. Forming a company
Management of the company is governed either by replaceable rules or constitution
Replaceable rules
“Pro-forma” rules contained within Corporations Act
Rules deal with… (Note 1 )
Constitution
Necessary if a company wants rules different to the pro-forma rules in the replaceable rules
Public company must lodge constitution with ASIC
Note 1: Replaceable rules deal with
Issues relating to directors (appointment, powers, remuneration and termination)
Directors’ meetings
Members’ meetings
Inspection of companies books and records
Shares and share transfers

10. Administration of a company
Directors manage on behalf of the members
Certain registers and records must be maintained
Minute books – records actions/decisions in meetings
Financial records – to enable statements to be audited
Registers of members (Share register)
Register of option holders
Register of debenture holders
Required to be kept at the company’s registered office
LO4: Describe the types of records needed to manage a company (p. 9)

11. Funding a company
A public company can raise funds by issuing securities:
Shares (equity)
Debentures (debt)
Options (equity)
Shares represent ‘ownership’ and can be issued to the public or privately ‘placed’ with new investors or current shareholders
Debentures represent a claim on the assets of the company and may be secured by a fixed or floating charge of the company’s assets
LO5: Compare and contrast shares and debentures, and discuss the reasons for issuing disclosure documents (pp. 9 – 12)
Options
Give the holder the right but not the obligation
To buy or sell a specified number of company securities (shares or debentures)
At a stipulated price (the strike price)
At a specified date
Shares can be of different types
ordinary shares
preferences shares (special rights for such shares must be specified in constitution or via a special resolution
Public float is the most popular method to raise equity in Australia
Debentures descriptions include
A mortgage debenture
A debenture
An unsecured note or
Unsecured deposit note
A debenture trust deed must be executed and a trustee appointed for debenture holders

12. Funding – disclosure documents
Most public issues of shares, debentures or options require a disclosure document to be issued:
Written notice inviting subscription
Content regulated by Corporations Act
Contains issue price, terms and conditions
Copy of the disclosure document must be lodged with ASIC
A prospectus is an example of a disclosure document
Most public issues require a DD – exceptions include, for example
Small-scale personal offers
Offers to sophisticated investors, professional investors, etc.

13. Background to the Corporations Act (2001)
The Corporations Act (2001) arose from Corporate Law Economic Reform Program (CLERP)
Federal Government program, commenced in 1997
Nine discussion papers: CLERP 1 – CLERP 9
Resulted in wide ranging reforms including:
Ease of access to capital / enhanced shareholder rights
Greater commercial / international focus for accounting standards
Establishment of the FRC / reformed auditing practices
Regulation of financial services and continuous disclosures
Most recently, changes to dividend rules and remuneration disclosures
LO6: Discuss the background and purpose of the Corporations Act 2001 by which companies are formed, administered and dissolved (pp. 12 – 13)
FRC – Financial Reporting Council

14. Accounting regulation of companies
Brief history of accounting regulation in Australia
Pre – 1984; AARF (Australian Accounting Research Foundation) & the professional bodies
1984 – ASRB (Australia Standards Review Board)
1988 – ASRB empowered to develop standards
1991 – AASB (Australian Accounting Standards Board)
The 90s – “The conceptual framework”
1999 – AASB disbanded / replaced by new AASB
Since 2000 – new AASB supervised by the Financial Reporting Council (FRC)
LO7: Evaluate the reasons for the development of accounting standards and describe the current arrangements for establishing accounting standards in Australia, subject to global influences in the standard-setting process (p. 14 – 24)
Pre-1984 – government not involved in development or enforcement of accounting standards; problems with non-compliance
1984 – govt. established the ASRB – standards developed by AARF, reviewed and approved by ASRB, enforced by law (but with a ‘true and fair’ override)
1988 – ASRB now responsible for development of standards
1991 – ASRB replaced by larger more powerful AASB – true and fair override removed to improve compliance
The 90s – AASB / AARF develop CF – SAC 1 to 4 – major achievement but also source of criticism
1999 – AASB disbanded under CLERP and replace by a new AASB, supervised by the FRC

15. Financial Reporting Council (FRC)
Role of the FRC includes:
Oversee / give advice – standard setting processes – AASB & AUASB
Determine broad strategic directions, monitor priorities and appoint members
Monitor development of international accounting standards
Assess continued relevance and effectiveness of accounting and auditing standards
Ensure AASB standards are at least in harmony with international standards
The FRC cannot direct the AASB or AUASB in relation to a particular standard and cannot veto a standard
AUASB = Auditing and Assurance Standards Board
FRC membership – representatives of professional, business and govt. organisations with an interest in standard setting
Latest developments – 2011 – FRC strategic plan – priority project task forces for the following areas:
board education — how to improve financial literacy of company directors
integrated reporting — consider the position and role for the FRC in relation to integrated reporting
managing complexity — consider how to reduce complexity in financial reporting
audit quality — to monitor audit quality drivers
public sector — to consider public sector issues and standards.

16. Australian Accounting Standards Board (AASB)
Under ASIC Act 2001 s.227(1), AASB is required to:
develop a conceptual framework
make accounting standards for purposes of the Corporations Act
formulate accounting standards for other purposes
(e.g. non-companies, the public sector and the not-for-profit sector)
participate in the development of a single set of accounting standards for worldwide use
promote the main objectives of developing accounting standards
Discuss making accounting standards
Vs.
Formulating accounting standards

17. AASB Accounting Standards
The ASIC Act 2001 specifies three objectives of developing accounting standards:
Financial information objective
Users & Directors
Qualitative characteristics
Facilitate the Australian economy objective
Reduce cost of capital
Enhance the international competiveness of Australian entities
Standard will be clearly stated and easily understood
Maintain investor confidence objective
In the economy and in capital markets
1. Accounting standards developed by AASB should provide financial information that:
allows users to make and evaluate decisions about the allocation of scarce resources
assists directors to discharge their financial reporting obligations
is relevant to assessing performance, financial position, financing and investment
is relevant and reliable
facilitates comparability and
is readily understandable

18. AASB Accounting Standards
2002 – FRC announced AASB would adopt IASB standards for all financial statements for years starting 1 Jan 2005
Initially AASB harmonisation process:
restricted some options allowed by international standards but such disparities have now been eliminated
required more detailed disclosures, but these have now been removed
Differences are made obvious in AASB standards
Additional paragraphs for public and not-for-profit sector entities (clearly labelled by AUS prefix)
Additional paragraphs related to Reduced Disclosure Requirements
2002 FRC ‘adoption strategy’ designed to meet second objective mentioned on previous slide
Enhance cross-border comparisons by investors
Reduce the cost of capital
Assist Australian companies to raise capital

19. AASB standards and interpretations
AASB now deals directly with interpretations issued by IFRS Interpretations Committee (IFRIC)
Advisory Panels are formed as required (UIG now defunct)
In summary, AASB
Adopts IASB standards & interpretations
Public and not-for-profit sectors
Inserts AUS paragraphs
Provides local standards & interpretations
Is a member of ASAF of the IASB
Accounting Standards Advisory Forum
AASB Advisory panels are formed when:
further guidance might be required for an interpretation
an Australian interpretation is required to deal with an issue that relates to matters unique to the Australian legal environment
Interpretations numbered 1 – 1000 originate from IFRIC or its predecessor
1001+ are unique to Australia and have no international equivalent
In summary, AASB
Adopts IASB standards and interpretations with minimal input into their development
In relation to the public and not-for-profit sectors
the AASB inserts additional paragraphs (with the AUS prefix) as required to adopted standards and interpretations, and
provides unique Australia standards and interpretations that deal with issues specific to these sectors
Provides technical advice and expertise as a member of the IASB Accounting Standards Advisory Forum (ASAF)

20. Source of AASB Standards
As a result of adopting international standards there are three sources of AASB standards
AASB 1-99
equivalent to IFRS standards issued by the IASB
have same number as equivalent IASB standard
IFRS 2 = AASB 2 Share-Based Payment
AASB
equivalent to IAS standards issued by the IASC (predecessor to the IASB)
have same number (+100) as the IAS standards on which they are based
IAS 16 = AASB 116 Property, Plant & Equipment

21. Source of AASB Standards
Australian standards with no international equivalents
Have same number as in previous AASB standard
AASB 1048 Interpretation and Application of Standards
AASB 1049 Whole of Government and General Government Sector Financial Reporting
AASB 1054 Australian Additional Disclosures
AASB 1048 – provides legal enforcement for the interpretations listed in the standard
AASB 1049 – is an example of an Australian developed standard dealing with the public sector
AASB 1054 – is an example of an Australian developed standard that relates solely to the Australian legal environment

22. Current standard-setting arrangements
In summary, the institutional arrangements for setting accounting standards and interpretations in Australia can be summarised in Figure 1.1
Treasurer of Australian Government – Appoints the chairman of the FRC and either chooses FRC members or chooses organisational bodies to choose a member to represent them
FRC – acts as overseer and advisory body to the AASB, and sets it broad strategic direction and funding budget, but it cannot direct the AASB in relation to the development or making of a particular standard. It also does not have the power to veto a standard recommended by the AASB (although the Parliament can do this)
AASB – Its function is to develop mandatory Australian AASB accounting standards suitable for the Australian business environment in a global market. The AASB standards are to be applicable to relevant companies under the corporations Act and for other reporting entities in other sectors (public sector, not-for-profit sector)
Lobby Groups – have some influence on the FRC and their members (representatives of professional, business and government organisations with an interest in the standard setting process) and on the AASB as the AASB invites consultation, discussion and comments to its exposure drafts.

23. International Accounting Standards Board (IASB)
1973 IASC (International Accounting Standards Committee)
Membership – professional accounting bodies
2001 IASB formed to replace IASC
Membership – representatives of accounting standards boards
Independent, privately funded accounting standard setter
Overseen by the IFRS Foundation
Committed to the development of a single set of
high quality, understandable, enforceable and
globally accepted accounting standards

24. Financial Accounting Standards Board (FASB)
2005 – Memorandum of Understanding – convergence of US GAAP and IFRS
Joint projects have been undertaken ever since
2008 – G20 urged FASB and IASB to complete convergence
Roadmap developed by SEC , with SEC to decide in 2011 for application from 2014
2010 – FASB and IASB recommit to 2011 timeline
2011 – no decision by SEC
2012 – a further work plan developed
Considerable opposition in US – outcome is still uncertain
Since 2007, SEC has allowed non-US companies to issue annual reports using IFRSs without having to reconcile to US GAAP; however, when domestic US companies will adopt IFRSs is not clear
FASB – the accounting standard setting board for USA
Objective of a single set of international accounting standards cannot be achieved without the US being involved and an adopter
G20 involvement – leaders of the Group of 20 nations (G20) request that international accounting bodies redouble their efforts to achieve a single set of high quality, global accounting standards through their independent standard-setting processes and complete their convergence project in June 2011.
Whether and how US will incorporate IFRS for domestic application is unclear
US GAAP is embedded in US laws and regulations and in private contracts

25. IFRS Interpretations Committee
Sub-committee of the IASB
Task is to deal with issues of widespread importance on a timely basis
Reporting issues not covered in IFRS standards
Issues of unsatisfactory or conflicting interpretations
IFRS Interpretations
are adopted by the AASB
with additional AUS paragraphs added for public and not-for-profit sectors

26. AOSSG and EFRAG Asian-Oceanian Standard-Setters Group
Established 2009, initiated by China, Japan and Korea
Now has 25 member countries
Lobby group to IASB representing views of developing countries
European Financial Reporting Advisory Group
Provides assistance to European Commission regarding endorsement and implementation of IFRS standards and interpretations
Participates in IASB due process
European listed companies have applied international standards in consolidated accounts since 2005

27. Australian Securities and Investments Commission
ASIC
Independent government body that administers and enforces
Corporations Act (investigate and prosecute breaches)
Financial services laws to protect consumers, investors and creditors
ASIC Act 2001 requirements of ASIC include
Maintain/ improve financial system
Promote confident / informed participation by investors and consumers
Administer laws with minimal ‘red tape’
Monitor / promote market integrity and consumer protection
Since 2010 ASIC is responsible for supervision of securities markets
Supervise real-time trading and prosecute misconduct
LO8: Discuss the roles played by the Australian Securities and Investments Commission (ASIC) and the Australian Securities Exchange Limited (ASX) (pp. 25 – 26)

28. Australian Securities Exchange
ASX
A public company that operates Australia’s share markets
Prior to 2010 it had a supervisory role
Improves information disclosure via its Listing Rules
Played a major role in influencing the move towards the AASBs adoption of IASB standards

29. General purpose financial reports
GPFRs – defined in SAC1 Definition of the Reporting Entity
A financial report intended to meet the information needs common to users who are unable to command the preparation of reports tailored so as to satisfy, specifically, all of their information needs
i.e. a report for ‘dependent’ users
SAC1 – GPFRs should apply all AASB accounting standards
If not a GPFR, it is a Special Purpose Financial report (SPFR)
Over companies in Australia provide financial reports
(ASIC 2012)
LO9: Analyse the concepts of general purpose financial reporting and the reporting entity (pp. 26 – 28)
SAC: Statements of Accounting Concepts

30. The reporting entity concept
SAC1 (para. 40) – a reporting entity is an entity for which
it is reasonable to expect the existence of users
who rely on general-purpose financial reports
for information useful for making and evaluating decisions
about the allocation of scarce resources
Who are the users?
SAC 2 (now withdrawn) identified many users (Note 1)
IASB / FASB CF Project Phase A – narrows the users identified
Existing and potential investors
Lenders and other creditors
i.e. providers of financial resources
Note 1: Under the former SAC 2 classes of users include:
Investors
Employees
Lenders
Suppliers
Customers
Government agencies and regulatory bodies
The general public
The IASB / FASB CF project is discussed in more detail in CH 3
Phase A, dealt with objectives and qualitative characteristics
Now complete – IASB released The Conceptual Framework for Financial Reporting in 2010
Adopted by AASB in 2013
changes incorporated into The Framework
SAC 2 was withdrawn

31. Differential reporting
IASB approach – all General Purpose Financial Statements will
Apply all international accounting standards
Provide required disclosures and any other requirements
This is very costly approach for SMEs
IASB produced a new standard IFRS for SMEs (Note 1)
Extensively reduced disclosure requirements
Reduced accounting choices
Simplified accounting methods
Less frequent changes to rules
LO10:Describe the current differential reporting requirements
Note 1: This is a 230 page stand-alone accounting standard. It’s full name is International Financial Reporting Standard for Small and Medium-sized Entities

32. Public accountability test
Under the IFRS for SMEs standard
A ‘public accountability’ test applies (Note 1)
An entity has public accountability if:
Its debt or equity instruments are traded in a public market,
It is in the process of issuing such instruments for such trading, or
It holds assets in a fiduciary capacity
Note 1: An SME is defined as an entity that
Publish general purpose financial statements for external users
Do not have public accountability

33. Differential reporting in Aust.
In Australia reporting entities under Chapter 2M are required
to comply with all accounting standard requirements (Note 1)
Differential reporting
Currently limited to the ‘size test’ in the Corporations Act
AASB has not adopted the omnibus standard from IASB
Differential reporting introduced in a two stage process
Stage 1: Introduce the Reduced Disclosure Regime (Note 2)
Australian SMEs must still apply all recognition and measurement rules
Note 1: In Australia reporting entities that are required to follow the disclosure legislation contained in Chapter 2M of the Corporations Act must comply with accounting standard requirements
Recall the small vs large tests for proprietary companies. It represents a differential reporting regime based on size characteristics but does not address the cost issue for SMEs.
Note 2: We will discuss stage two on last slide

34. Reduced disclosure regime (RDR)
AASB 1053 Application of Tiers of Australian Accounting Standards applies for years commencing 1 JULY 2013 (Note 1)
Introduces two tiers of reporting:
Tier 1 – comply fully with disclosure requirements of AASB accounting standards
Tier 2 – can adopt a Reduced Disclosure Regime
Tier 2 entities have substantially reduced disclosures
However, they have the same recognition, measurement and presentation requirements
AASB have also included Public and NFP sectors in the RDR
Note 1: The approach in Australia, unlike the IASB standard IFRS for SMEs, relates only to disclosures.
The next slide shows Table 1.1, which highlights the key components of the differential reporting requirements of AASB 1053

35. Reduced disclosure regime (RDR)
An entity in the For-Profit sector that is ‘publicly accountable’ will be included in Tier 1 and must provide full disclosures under AASB accounting standards. A ‘non-publicly accountable’ entity is classified as Tier two and can elect to use the RDR.
To be Publicly accountable:
- Apply the same tests as outlined earlier in reference to the IASB IFRSs for SMEs standard
Non-reporting entities will continue to be excluded from the requirements to prepare a GPFR, but may still need to prepare a SPFR.

36. Stage 2 – Differential reporting
Stage 2: Shift from reporting entity concept to GPFRs
IFRSs adopted in Aust. apply to GPFRs rather than reporting entities
International focus is on boundaries of the reporting entity (Note 1)
AASB released ED 193 in 2010
Conceptual Framework for Financial Reporting: The Reporting Entity
A circumscribed area of economic activities
Whose financial information has potential to be useful
To existing and potential investors, lenders and other creditors
Who cannot directly obtain the information required
For decisions about providing resources and to assess whether management / the board have made efficient use of resources provided
Note 1: Internationally the reporting entity concept is used to determine the boundaries of the entity being reported on, rather than which entities should prepare GPFR