Australian

School of Business
ACCT 1501 Accounting and Financial Management 1A
Session 2 2014

Week 9
Financial Reporting Principles, Accounting Standards and Auditing
and Sustainability Reporting
Student Handout







Lecturer:
Dr. Radzi Jidin
School of Accounting
UNSW
QUAD 3114
r.jidin@unsw.edu.au

Moodle: https://moodle.telt.unsw.edu.au/login/index.php


WEEK 9:
1. Introduction
This topic examines traditional financial reports i.e., annual reports, and the
assumptions and accounting standards which underpin traditional financial reporting.
We examine the content, format, and context of annual reports.
We then consider information that is omitted from traditional financial reporting.
This leads us to explore sustainability reporting, a form of triple bottom line
reporting. We pay particular attention to sustainability disclosures relating to energy
usage and greenhouse gas emissions i.e., environmental reporting. We also consider
another development in corporate reporting: integrated reporting.
At the end of this topic, you should be able to:
1) Explain the principles and concepts that guide the preparation of financial reports
2) Apply the definitions of assets, liabilities and equity, and determine when an asset
or liability should be recognised
3) Identify and evaluate the criticisms of traditional financial reporting
4) Explain what sustainability reporting is
5) Provide examples of energy and greenhouse gas emission disclosures
6) Identify the objectives of integrated reporting.
Required reading
Trotman, Gibbins & Carson Chapter 6: pp. 289-327
Chapter 7: pp. 345-377

2. Tutorial Questions Week 10

Students should attempt these questions before the tutorial.
Preparation Questions:
Financial Reporting, Standards and Auditing: DQ 6.1, 6.9, 6.12, 6.13, 6.16, P6.9,
P6.11, Case 6A (Parts 1-5, 8-10)
Sustainability Reporting: DQ7.2, 7.7, 7.16, 7.30, P7.3.
Tutorial Questions:
Financial Reporting, Standards and Auditing: DQ 6.38, P6.4
Sustainability Reporting: DQ7.34, P7.7

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Australian School of Business

ACCT1501
Accoun,ng and Financial Management 1A

Week 9
Financial Repor,ng Principles, Accoun,ng Standards
and Audi,ng, and Sustainability Repor,ng

Session 2 2014
Radzi Jidin
School of Accoun,ng

Topic 9: Learning Objec,ves (LO)

LO1: Explain the principles and concepts that guide the prepara<on of

nancial reports.
LO2: Iden<fy and evaluate the cri<cisms of tradi<onal nancial repor<ng
LO3: Explain what sustainability repor<ng is
LO4: Provide examples of energy and greenhouse gas emission
disclosures
LO5: Iden<fy the objec<ves of integrated repor<ng

Essen<al Reading:

Part 1: TG&C Chapter 6, Appendix 1 Woolworths Report, CF 2013-1

Part 2: TG&C Chapter 7

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Outline
Basically, by the end of this lecture you should have a broad
understanding of what commonly goes (or can go) into a
companys annual report, and why!

And who is involved

The annual report usually contains (text p.310)

1. Summary performance data

2. Le]er from the chairperson (or managing director) to shareholders
3. CEO report
4. Corporate governance statement if co. listed (ASX requirement)
5. Financial statements: (1) balance sheet (2) income statement (3)
statement of changes in equity (4) cash ow statement (5) notes
6. Directors statement (Corpora<ons Act 2001 requirement)
7. Independent audit report
8. Directors report
9. Info about substan<al shareholders (listed companies)
10. Sustainability repor<ng
11. Other voluntary informa<on

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How long is the annual report?

BHP Billiton 2012 Annual Report 280 pages

Woolworths 2011 Annual Report 176 pages

Lecture outline

Part A: Financial repor<ng (LO1)

1. Generally Accepted Accoun<ng Principles (GAAP)
Components of nancial statement

2. Ensuring nancial repor<ng quality

Corporate governance
Hierarchy of a corpora<on
Financial repor<ng process:

Key players: management, board of directors, external

auditors

Part B: Sustainability and integrated repor<ng (LO2-5)

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1. Generally Accepted Accoun,ng Principles (GAAP) LO1

How do we determine what goes into nancial statements?
GAAP

Rules, standards and usual prac<ces that companies are

expected to follow when preparing nancial statements
Accoun<ng standards
Conceptual framework

SAC 1 Deni<on of the Repor<ng En<ty

SAC 2 Objec<ve of General Purpose Financial Repor<ng
AASB Framework for the Prepara<on and Presenta<on of Financial
Statements (CF 2013-1 Amendments December 2013)

Framework for the prepara,on and presenta,on of FS LO1

The Framework includes coverage of:
A. Objec<ves of nancial reports
B. Assump<ons underlying reports
C. Qualita<ve characteris<cs of nancial informa<on
D. Deni<on of elements of nancial statements
E. Recogni<on and measurement of those elements

Lets consider each of these

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A. Objec,ve of nancial reports

LO1

To provide informa<on about

nancial posi<on
nancial performance
cash ows
that is useful to users in making economic decisions.

B. Underlying assump,ons

LO1

Two key assump<ons:

1. Accrual basis of accoun<ng
Recognising economic events regardless of when cash
transac<ons happen
Revenues & expenses are reected in the accounts in the
period to which they relate.

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B. Underlying assump,ons

LO1

2. Going concern
Assump<on that en<ty will con<nue in opera<on for the
foreseeable future.
If not nancial reports need to be prepared on a basis
other than historical cost. i.e., liquida<on value
Liquida<on value normally a lot lower than historical book
value due to limited market for the assets

Other assump<ons that many users consider important:

Accoun<ng en<ty , period, monetary assump<ons

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C. Qualita,ve characteris,cs (the 2 biggies)

LO1

A]ributes that make informa<on useful to users!

Two fundamental qualita<ve characteris<cs:

i. Relevance
Predic.ve value
Conrmatory value
Materiality

ii. Faithful representa<on

Complete
Neutral
Free from error

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C. Other (Understandability)

LO1

Financial reports should be readily understandable by users

Users expected to have reasonable knowledge of business,

economic ac<vi<es and accoun<ng
Also expected to have willingness to study the info with
diligence
There have been concerns about the growing complexity of
nancial reports, however
Info about complex ma]ers cannot be excluded on grounds
that it is dicult to understand (if deemed relevant to users)!

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C. Other (Comparability)

LO1

Users must be able to compare nancial statements of a

business through <me in order to iden<fy trends in
posi<on and performance
Compare across dierent businesses

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C. Other (Consistency, Veriability, Timeliness)

Consistency means use of same methods for same items
from period to period
Veriability means consensus view
Timeliness means that the informa<on is available in
<me for decision-making

15

Where are we now?

Part A: Financial repor<ng (LO1)

1. Generally Accepted Accoun<ng Principles (GAAP)
Components of nancial statement

2. Ensuring nancial repor<ng quality

Corporate governance
Hierarchy of a corpora<on
Financial repor<ng process:

Key players: management, board of directors, external

auditors

Part B: Sustainability and integrated repor<ng (LO2-5)

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Components of nancial statements

5 components:

Balance sheet
Income statement
Statement of changes in equity
Statement of cash ows
Notes to the nancial statements

Key elements

Financial posi<on (balance sheet): assets, liabili<es & equity

Financial performance (income statement): revenue & expenses

17

Where are we now?

Part A: Financial repor<ng (LO1)

1. Generally Accepted Accoun<ng Principles (GAAP)
Components of nancial statement

2. Ensuring nancial repor<ng quality

Corporate governance
Hierarchy of a corpora<on
Financial repor<ng process:
Key players: management, board of directors, external
auditors

Part B: Sustainability and integrated repor<ng (LO2-5)

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2. Ensuring nancial repor,ng quality

Ensuring nancial repor<ng quality

Corporate governance
Hierarchy of a corpora<on
Financial repor<ng process:
Key players: management, board of directors, external
auditors

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Corporate Governance

The framework of rules, rela<onships, systems and

processes within and by which authority is exercised and
controlled in corpora<ons (ASX, 2010)
From the nancial repor<ng perspec<ve

Prepara<on of nancial statements

Approval of nancial statements
Assurance of nancial statements

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Corporate Governance

LO1

Objec<ves

21

Protect shareholder interests

Establish and disclose roles/responsibili<es of board &
management
Structure the board to add value
Respect shareholder rights
Make <mely and balanced disclosure
Recognise and manage risk
Remunerate fairly and responsibly
Statutory and legal compliance
Commitment to values and ethical conduct of business
Promote ethical and responsible decision-making in achieving
corporate objec<ves
Safeguard integrity in nancial repor<ng

Hierarchy of a Corpora,on
Shareholders (owners) vs. Management (agent)

Poten<al problems?
Agency problem
Agency theory

Board of Directors

Oversight
Protec<ng the interests of shareholders

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Hierarchy of a Corpora,on
Shareholders

Board of Directors

Management

Principal

Go-between

Agent

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Board Structure
Generally, the Board is structured in a manner whereby
there is a main Board, comprising all directors, and a
range of commi]ees, comprising selected directors.

E.g., remunera<on commi]ee and audit commi]ee

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Financial Repor,ng Process - Management

Management

Prepares Financial Statements

Making judgements about measurements of assets and
liabili<es, revenues and expenses
What is recognised on the B/S and I/S
Impact on ra<os! (week 10)

25

Financial Repor,ng Process Board of Directors

Board of Directors

Approves nancial statements by signing o the nancial

statements
Legally responsible for nancial statements

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Financial Repor,ng Process External Auditors

Financial statements prepared by management
Management interest may be in conict with those of
shareholders
Shareholders cant verify whether the nancial statements:
present true and fair view
free from material misstatements
Free from undue bias

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Financial Repor,ng Process External Auditors

External auditors

Evaluate the nancial statements

Do not prepare nancial statements
Must be independent of the management

Add credibility to financial statements

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Financial Repor,ng Process External Auditors

Auditors should provide an independent, unbiased and
professional opinion on whether the nancial statements:
in accordance with Corpora<on Act 2001
provide true and fair view
complies with:
Generally accepted accoun<ng principles (GAAP)
accoun<ng standards
Other professional mandatory repor<ng requirements

29

Financial Repor,ng Process External Auditors

Types of audit opinions

Unqualied opinion: when the auditors believe that the

nancial statements give a true and fair view, that they are
in accordance with the provisions of the Corpora<on Act
2001, applicable accoun<ng standards (GAAP) and other
professional mandatory repor<ng requirements.

Qualied opinion: except for a specic ma]er, auditors
are sa<sed
reects true and fair view of the companyexcept for the
following issues outlined below

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Financial Repor,ng Process External Auditors

Types of audit opinions

Adverse opinion: when the auditors believe that the

nancial statements are not presented fairly

Disclaimer: when the auditors unable to express an opinion

because of limita<on in the work the auditors were able to
do.

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Ensuring nancial repor,ng quality

LO1 & 3

In summary
Who prepares nancial informa<on?

Who is responsible for the prepara<on and presenta<on of

nancial statements

Who approves the nancial statements?

Who adds credibility by assuring the nancial statements?

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Other Aspects of Financial Repor,ng

LO1

Professional Ethics
Informa<on outside the nancial statements

Social, environmental repor<ng

Sustainability repor<ng
Part B!

33

Professional Ethics Accountant

Ten most common ethical problems:
1. Tax evasion
2. Financial statement manipula<on
3. Presen<ng nancial informa<on to deceive users
4. Conict of interest
5. Technical incompetence

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Professional Ethics Accountant

6. Asking subordinate to do something unethical
7. Whether to admit mistakes
8. Insider trading
9. Maintaining conden<ality
10. Whether to accept favours and girs

35

Where are we now?

Part A: Financial repor<ng (LO1)

1. Generally Accepted Accoun<ng Principles (GAAP)
Components of nancial statement

2. Ensuring nancial repor<ng quality

Corporate governance
Hierarchy of a corpora<on
Financial repor<ng process:
Key players: management, board of directors, external
auditors

Part B: Sustainability and integrated repor<ng (LO2-5)

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Recall: The annual report usually contains (text p.310)

1. Summary performance data

2. Le]er from the chairperson (or managing director) to shareholders
3. CEO report
4. Corporate governance statement if co. listed (ASX requirement)
5. Financial statements: (1) balance sheet (2) income statement (3)
statement of changes in equity (4) cash ow statement (5) notes
6. Directors statement (Corpora<ons Act 2001 requirement)
7. Independent audit report
8. Directors report
9. Info about substan<al shareholders (listed companies)
10. Sustainability repor<ng
11. Other voluntary informa<on

37

Part B: Sustainability

LO2-LO5

a business approach that creates long term

shareholder value by embracing opportuni<es and
managing risks deriving from economic, environmental
and social developments (Dow Jones Sustainability Index)

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Sustainability

LO3

Background
Corporate managers only moral obliga<on is to its shareholders
and that the only one social responsibility of business is to use its
resources and engage in ac<vi<es designed to increase its prots
as long as it stays within the rules of the game, which is to say,
engages in open and free compe<<on, without decep<on or
fraud. (Friedman, 1962; p.133)
Do you agree with this?

39

Sustainability

LO3

Background (cont.)
Management only responsible to shareholders????

How about to other users of the annual report

Employees, customers, suppliers, creditors, general public

What about social responsibili<es, the environment, and long-

term strategies?

Demand for informa<on on environmental, social and

economic performance

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LO3

Sustainability

Five types of capital that reect companys impact and wealth

Natural capital
Human capital
Social capital
Manufactured capital
Financial capital

Sustainability
management
maintenance and long
term enhancement of
these capital

You may also hear references to Triple-Bo]om-Line (TBL) repor<ng

1. Economic nancial performance
2. Environment performance directly related to natural capital
3. Social performance directly related to human and social capital
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Sustainability Repor,ng: Deni,on

LO4

Organisa<ons repor<ng on its environmental, social and

economic performance

The prac<ce of measuring, disclosing and being
accountable to internal and external shareholders for
organisa<onal performance towards the goal of
sustainable development GRI Sustainability Repor<ng
Guidelines

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Sustainability Repor,ng: who for?

LO4

For the benets of Stakeholders

Investors
Customers
Employees
Suppliers
Communi<es

43

Stakeholders
Na.onal Australia Bank

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Sustainability Repor,ng Why? [Refer to TGC p. 351] LO3

External reputa<on

Transparency

Financial incen<ves

Opportuni<es for cost savings

Long-term perspec<ves

Dieren<a<ng the company to stakeholders

Compe<<veness

Improving internal processes

Con<nuous improvements

However.<me-consuming and costly?

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Sustainability Repor,ng what to report?

LO4

Largely voluntary!!!
Examples
Environment

Energy consump<on
Water consump<on
Emissions

Social responsibili<es

Local community

Human rights

An<-discrimina<on
No child labour

Consider the following about

this informa<on:
1.
2.
3.
4.
5.

Is it relevant?
Is it numerical?
Is it nancial?
Where should it be reported?
Who will use it?

Labour prac<ces

OHS

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Sustainability Repor,ng Criteria

LO4

Disclosures in sustainability reports determined by

organisa<ons
Problems?

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Global Repor,ng Ini,a,ve (GRI)

LO4

The GRI most commonly used guidelines on sustainability

repor<ng prac<ces
Provides suciently detailed non-nancial performance indicators
under:

Economic economic performance, market presence, indirect impact

Environment e.g., energy consump<on, water use, biodiversity, GHG
emissions
Social labour prac<ces , human rights, product responsibility, society
(See Exhibit 7.4, TGC pp.354-5)

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LO4

Applying the GRI

The GRI has over 140 indicators
Up to the companies to choose
Applica<on level

The most
material 10
indicators

Somewhere
in the
middle!

A
All
indicators

If the report is assured by a third party, you can add + to

the level

49

Current Trends in Sustainability Repor,ng

LO4

What gets measured gets managed

Non-repor<ng companies under pressure to start repor<ng
Financial benets

Direct cost savings

Enhanced reputa<on in the market

External assurance (voluntary!)

Valida<on
By the accoun<ng profession

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Current Trends in Sustainability Repor,ng

LO4

Communica<ng sustainability to stakeholders

Separate sustainability report(Origin Energy 2012)

Corporate social responsibility website (Woolworths Ltd)
As part of the annual report (David Jones 2012)

Should sustainability repor<ng be mandatory?

Cost issues
Regula<on
Checklist mentality
Measurement issues

51

Sustainability example: Energy

LO5

Main focus of sustainability reports

Resource consump<on
Energy eciency

In Australia

Water and energy eciency

Highly dependent on fossil-fuelled energy
Increasing energy costs

Useful to managers, government, investors, and so on

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Energy and Greenhouse Gas Measurement & Disclosure LO5

Typically involves repor<ng:
Energy, greenhouse gas (GHG) emissions, and climate change-
related informa<on
Measurement
Energy info - quan<<es consumed & produced

Gigajoules (GJ) and Kilowa] hours (kWh)

Greenhouse info emissions released due to business ac<vity

Energy consump<on & produc<on leads to GHG emissions. GHG info oren
reported in tonnes of carbon dioxide equivalent (tCO2-e)

Please note: while you need to understand what is covered in the lecture notes,
you are not expected to remember the info in sec<on 7.7 of the text in great
detail (refer to it if it aids understanding).
53

Energy Measurement
1.
2.
3.
4.
5.
6.

LO5

Determine method of data consolida<on

Iden<fy energy and emission sources
Select a calcula<on approach
Calculate energy and emissions
Develop benchmarks and targets
Consider other climate change related informa<on

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Energy Measurement (Step 2)

LO5

Energy and emission sources categorised according to

whether they are direct or indirect.

Scope helps dis<nguish between these

Scope 1 Direct Emissions

Emissions over which a company has direct control

Scope 2 Indirect Emissions

Indirect control from the genera<on of purchased electricity,

heat or steam

Scope 3 Indirect emissions

Others

55

Energy RetailBank Example (TG 2013, p.363)

LO5

Please classify the items below as Scope 1, 2 or 3 (if applicable)

Own and operate an oce building located in the Sydney CBD

Under contract with Electricity Retailer A to supply electricity to
the building's common areas and to its own oce space
Also lets out some of the oors of the building and these tenants
organise their electricity independently
Also operate 3 chillers to provide Hea<ng, Ven<la<on and Air
Condi<oning (HVAC) services to the building's inhabitants. The
chillers consume electricity, but also leak HFCs, a potent
greenhouse gas.
Operates its own small eet of vehicles that consume unleaded
petrol and are kept in the building's car parking facili<es
Employees of RetailBank will, when required to travel, use taxis
and of course planes for interstate and interna<onal travel
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Energy Example [TGC 2013, p.363]

LO5

Scope 1 emission?

Chillers/HVAC system, Vehicle Fleet

Scope 2?

Electricity

Scope 3?

Taxies, Flights, Tenant Electricity

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Energy and GHG Disclosures

LO5

Regulatory (Mandatory)

In Australia certain disclosures are required to the

government
1. Na<onal Greenhouse and Energy Repor<ng Act, 2007

For large energy consumers/producers and GHG emi]ers

Energy produc<on and consump<on data

Scope 1 and 2 emission data
Uncertain<es associated with the above data
NGER reports are not public!

2. Energy Eciency Opportuni<es Act, 2006

Large energy-using businesses to iden<fy and evaluate cost

eec<ve energy savings opportuni<es

Voluntary - as part of the sustainability report

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Where are we now?

Part A: Financial repor<ng (LO1)

1. Generally Accepted Accoun<ng Principles (GAAP)
Components of nancial statement

2. Ensuring nancial repor<ng quality

Corporate governance
Hierarchy of a corpora<on
Financial repor<ng process:
Key players: management, board of directors, external
auditors

Part B: Sustainability and integrated repor<ng (LO2-5)

59

Integrated Repor,ng

LO5

Brings together material informa<on about an

organisa<ons strategy, governance, performance and
prospects in a way that reects the commercial, social
and environmental context within which it operates. It
provides a clear and concise representa<on of how an
organisa<on demonstrates stewardship and how it
creates and sustain value
(Interna.onal Integrated Repor.ng CommiUee, 2011)

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LO5

Integrated Repor,ng
Mission

Employees

Strategy
Risks

Ac,vi,es

Governance
Values
Performance

Environment

Customers

Suppliers
Social

Shareholders

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Integrated Repor,ng: 5 guiding principles

LO5

1. A strategic focus

Value crea<on, objec<ves

2. Connec<vity of informa<on

Performance is linked to economic, poli<cal social and

environmental context

3. Future orienta<on

Managements expecta<ons and plans for the future

4. Responsiveness and stakeholder inclusiveness

Stakeholder, not shareholder, perspec<ve

5. Conciseness, reliability and materiality

What really ma]ers

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LO1&6

Tradi,onal vs. Integrated Repor,ng

Stewardship

Financial Capital

All forms of Capital

Focus

Past, Financial

Past, Future, Connected

Timeframe

Short Term

ST, MT, LT

Concise

Long and complex

Concise & Material

Technology

Paper based

Technology enabled

Refer to Exhibit 7.12, T&G (2013) p.373

63

Integrated Repor,ng An Example

LO6

2012 Na<onal Australia Bank

A Review not an Annual Report

Brief and Concise
Non-nancial informa<on
Audience
Metrics are linked to strategy

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Integrated Repor,ng the Drivers

LO6

Internal management

Benets to the organisa<on by considering and

understanding CSR, nancial and non-nancial informa<on

Development of sustainability metrics and framework

Framework to report sustainability informa<on

Comparability

Policy and regula<ons

Lis<ng requirements

The Interna<onal Integrated Repor<ng Commi]ee (IIRC)

Standards being developed

65

Integrated Repor,ng Benets, Costs, & Problems! LO6

Benets

Relevant, concise informa<on to all par<es

The whole picture
Company can be]er understand its opera<ons

Costs

Sensi<ve informa<on (disclosing strategies, risks, and values!)

Expensive to collect Informa<on?

Problems

Measurement! Financial vs. non-nancial info.

Can comparisons really be made? (IIRC developing a standard)
Audit and assurance who can do it?

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Revision Ques,on 1
Which of the following statement is incorrect?
A. Relevance and faithful representa<on are two
fundamental qualita<ve characteris<cs
B. If the en<ty intends or needs to liquidate, liquida<on
value should be used.
C. Financial reports are prepared on the assump<on that
the en<ty will not con<nue in opera<on for the
foreseeable future.
D. Notes to the nancial statements are one of the
components of a standard set of nancial statements
67

Revision Ques,on 2
Which of the following statement is incorrect?
A. To add credibility to the nancial statements, auditors
must be independent from management
B. Board of directors is responsible to approve nancial
statements
C. Management is responsible to audit nancial
statements
D. Auditors should provide an independent, unbiased and
professional opinion
E. All of the above statements are incorrect
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Revision Ques,on 3
Which of the following statement is correct?
i. Enhancing external reputa<on is one of the reasons organisa<ons
produce sustainability reports
ii. Scope 1 emissions are all direct emissions over which a company
has direct control
iii. Connec<vity of informa<on is one of the objec<ves of integrated
repor<ng
iv. Sustainability repor<ng could assist organisa<ons in improving
internal processes
A. i, ii and iii
B. i, ii and iv
C. i and iv
D. i, ii, iii and iv
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