Accounting: Te Mātauranga Mahi Kaute

te mtauranga mahi kaute
accounting
2013/1
AC3004
CONCEPTS FOR REPORTING ENTITIES
NCEA LEVEL 3
te aho o te kura pounamu
accounting
ncea level 3
Expected time to complete work
This work will take you about 15 hours to complete.
You will work towards the following standard:
Achievement Standard 91404 (Version 1) Accounting 3.1
Demonstrate understanding of accounting concepts for a reporting entity
Level 3, External
4 credits
In this booklet you will focus on these learning outcomes:
describing the features of reporting entities and apply the statutory reporting requirements
describing New Zealand Generally Accepted Accounting Practice (NZ GAAP)
describing general purpose financial reports
describing and applying the New Zealand Framework for general purpose financial
statements.
All the work for this standard is in this booklet.
Copyright 2013 Board of Trustees of Te Aho o Te Kura Pounamu, Private Bag 39992, Wellington Mail Centre, Lower Hutt 5045,
New Zealand. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without
the written permission of Te Aho o Te Kura Pounamu.
1 AC3004
contents
1 Features of reporting entities
2 New Zealands Financial Reporting Framework
3 General purpose financial reports
4 Qualitative characteristics
5 Financial elements
6 Teacher-marked activities
7 Answer guide
2 AC3004
how to do the work
When you see:

1A
Complete the activity.
Check your answers.
Your teacher will assess this work.
Note this key point.
You will need:
a pen and paper
a calculator.
Resource overview
Complete your practice activities on your own paper (or one of the templates provided) and
return them with your completed teacher-marked activities in this booklet.
Ensure that you have attempted all activities on your own before referring to the Answer guide.
At the end of each lesson, mark your practice work (
P
/X) from the Answer guide.
Take particular note of the key points as they will help you in your assessments.
Refer to the glossary in the Reference guide for an explanation of any new words you are not
familiar with.
Each lesson begins with:
Learning intentions: what you are learning in this lesson
Success criteria: what you should be able to do by the end of the lesson.
Assessment
In this booklet you will work towards meeting the following criteria. Refer to your Reference guide
for a full copy of achievement standard Accounting 91404 (Version 1) Accounting 3.1.
Achievement criteria 3.1
Achievement Achievement with Merit Achievement with Excellence
Demonstrate
understanding of
accounting concepts for
a reporting entity.
Demonstrate in-depth
understanding of
accounting concepts for a
reporting entity.
Demonstrate comprehensive
understanding of accounting
concepts for a reporting entity.
3 AC3004
features of reporting entities 1
learning intention
To describe the features of reporting entities.
success criteria
You will be able to:
describe accountability
recognise stakeholders of reporting entities
describe the contents of an annual report.
introduction
You will remember reading in booklet AC3001 that the Level 3 Accounting course (AC3000)
extends the context of entities beyond the sole proprietor to include partnerships and reporting
entities. In this booklet we take a closer look at reporting entities.
what is a reporting entity?
The Financial Reporting Act 1993 gives the following examples of reporting entities:
issuers, which are companies that issue securities such as shares and debentures to the
public, registered banks and insurance companies
overseas companies
subsidiary companies
companies that have one or more subsidiaries
companies with assets valued at more than $450,000
companies with a turnover in excess of $1,000,000.
Important note
Issuers and companies are mainly private sector entities, although certain public sector entities
such as state owned enterprises (SOEs), some Crown entities and some local authority trading
enterprises (LATEs) are companies and therefore subject to the requirements of both the
Financial Reporting Act 1993 and Companies Act 1993.
Key point
Put very simply, a reporting entity is a limited area of economic activity whose financial
information has the potential to be useful to existing and potential equity investors, lenders
and other creditors.
4
AC3004
features of reporting entities
For example, Air New Zealand sells/issues shares to the public and therefore it is a reporting
entity. The principal activity of Air New Zealand is the operation of domestic and international
passenger transport and cargo. Air New Zealands guiding principles are:
We will be the customers airline of choice when travelling to, from and within New Zealand.
We will build competitive advantage in all of our businesses through the creativity and
innovation of our people.
We will champion and promote New Zealand and its people, culture and business at home
and overseas.
We will work together as a great team committed to the growth and vitality of our company
and New Zealand.
Our workplaces will be fun, energising and where everyone can make a difference.
www.airnewzealand.co.nz/corporate-profile
When you read these guiding principles it is easy to see how potential investors could be
persuaded to invest in a company such as Air New Zealand.
It would be very tempting to invest with an entity that is committed to their growth and vitality,
because surely this must mean that if you invest in this company then they will be committed to
the growth of your investment? However, apart from this impressive non-financial information,
before you part with your money you would also be very interested in Air New Zealands financial
information so that you can make a more informed decision as to whether to be that investor, lender
or creditor to Air New Zealand. Below are extracts from Air New Zealands 2011 annual report.
2011
Company operating
revenue
$3,949m
2011
Company net profit for
the year
$223m
2011
Company total assets
$4,089m
i
s
t
o
c
k
5
AC3004
Imagine that you have just inherited a substantial amount of money and you are thinking of
purchasing shares in Air New Zealand. Apart from the extracts on the previous page, describe two
pieces of financial information that could influence your decision whether or not to purchase shares.
If you have time, look at Air New Zealands 2011 annual financial report, which is available as a
PDF from: www.airnewzealand.com/previous-reports
Browse through this, as it will help put your learning into a real scenario. There is a lot of
interesting financial information in this document.
Check your answers.
accountability
Reporting entities are required by the Financial Reporting Act 1993 to provide general purpose
financial reports (GPFR) for users and providers of resources (equity investors, lenders and other
creditors) to the entity.
There are some entities that are excused from the strict provisions of the Act. These are covered
under the statutory framework later in this booklet.
A reporting entity is considered accountable to their stakeholders, who include shareholders,
creditors, employees, local communities and society (including the environment).
1A
Creditors
Local
communities,
society
Stakeholders
in an entity
Employees Shareholders
6
AC3004
These stakeholders make economic decisions about the entity, such as:
deciding when to buy, hold or sell an equity investment in the entity
assessing the stewardship or accountability of the management of the entity
assessing the ability of the entity to pay and provide other benefits to its employees
assessing the security for amounts lent to the entity
determining taxation policies for the entity
determining distributable profits and dividends
preparing and using national income statistics
regulating the activities of entities.
The diagram on the previous page and the economic decisions above show it takes a wide range
of information to satisfy the range of stakeholders needs. The financial statements provide this
they are general purpose financial reports (GPFR), which provide stakeholders with financial
information that enables them to make informed decisions.
Stakeholders who are not members of the board are unable to contract for special purpose
financial reports (SPFR). This means they have to rely on the financial statements for making
decisions about providing further resources to the entity, and assessing whether management
and the governing body of an entity have made efficient and effective use of the resources that
have been provided.
Because the entity is accountable to the stakeholders, how the financial statements are
prepared and what the financial statements should include are very important; not only to the
entity but also to the stakeholders.
Definitions
General purpose financial reports are financial reports that provide information to meet
the needs of those external users who are not able to pay for special reports to be prepared
specifically for them.
Special purpose financial reports are financial reports tailored to meet the specific
information needs of a particular user.
i
s
t
o
c
k
7
AC3004
Objective of general purpose financial reporting
The objective of general purpose financial reporting is to provide financial information
about the reporting entity that is useful to existing and potential investors, lenders and
other creditors in making decisions about providing resources to the entity. Those decisions
involve buying, selling or holding equity and debt instruments, and providing or settling
loans and other forms of credit.
The New Zealand Framework 2011
Debt instrument
= mortgage/loan
(from the financial
sector the business)
Equity instrument
= shares (a share
in the ownership
or equity of a
business)
i
s
t
o
c
k
D
IR
EC
T
O
R
S
FEA
R
JA
IL FO
R
TA
K
IN
G
R
IS
K
S
www.stuff.co.nz/business/industries/7081715/Directors-fear-jail-for-taking-risks
ADAM
FEELEY:
EXPOSING NZS
FINANCIAL CRIM
E
People will be surprised both as to the scale
of fraud but probably also the breadth of
fraud. It happens everywhere, it happens in
the public and private sector... it happens in
charities, in banks, in sports clubs, in racing
clubs. It happens everywhere, Feeley said.
www.stuff.co.nz/national/politics/public-law-with-
mai-chen/6793984/Adam-Feeley-Exposing-NZs-
financial-crime
Recent cases in Australia and New Zealand involving
directors obligations sound a warning for any directors
who think:
the difference between governance and
management means that directors dont do detail
directors dont need a basic level of financial literacy, or
directors dont need a good understanding of the
companys business.
www.chapmantripp.com/publications/Pages/Backsides-exposed-if-noses-in-
fingers-out-means-hands-off-eyes-shut.aspx
LOM
BARD
DIRECTORS
SAY VERDICT
W
RONG
Lombard chairman Sir
Douglas Graham, along with
fellow former justice minister
Bill Jeffries, Lawrence
Bryant and Michael Reeves,
were found guilty of making
misleading statements in
documents seeking money
from the public between
December 2007 and April
2008, when Lombard was
put into receivership, owing
$111 million to about 3600
unsecured investors.
www.stuff.co.nz/business/6913494/
Lombard-directors-say-verdict-wrong
8
AC3004
contents of annual reports
As can be seen from the newspaper headlines on the previous page, as well the reporting entity
being accountable, the director or directors of the reporting entity are also accountable.
It is important that the financial reports of a reporting entity show a true and fair view. It is very
important that the stakeholders can understand and trust what is being said (or advertised)
about a reporting entity.
Key point
An annual report is a comprehensive report on a reporting entitys activities throughout
the preceding year. Annual reports are intended to give stakeholders information about the
companys activities and financial performance.
True and fair view
Whether financial statements are external annual reports or internally-focused management
statements, a clear objective has to be that the accounts fairly reflect the true substance
of the entity and the results of its activities.
The application of the principal qualitative characteristics and of appropriate accounting
standards normally result in financial statements that convey what is generally understood
as a true and fair view of, or presenting fairly, such information.
Full compliance with New Zealand International Financial Reporting Standards (NZIFRS)
would normally result in financial statements that show a true and fair view.
The following information must be included in an annual report:
description of the entitys affairs
Financial Statements
Auditors Report
Accounting Policies
charitable and political donations made since last annual report
name of each director, and the amount of their remuneration
amount of fees paid to the auditor
disclosure of interest made during the period covered by the annual report (see Note)
all directors notices covering use of company information during the period covered by the
annual report
all notices of directors share dealings made during the period covered by the annual report
the number of employees who were paid more than $100,000 in bands of $10,000 (for
example $100,000$109,999).
9
AC3004
Note
Disclosure of interest is a list of transactions and events that the directors have with the business.
This includes:
dealings in company shares
use of company information for personal use
remuneration from the company
loans or guarantees made to them by the company.
Although we have not yet covered all the accounting terminology below, this is a good chance for
you to take some time to research these accounting terms.

Use your local library or the Internet.
When preparing general purpose financial reports, entities must fully comply with NZ GAAP.
This includes full compliance with New Zealand International Financial Reporting Standards (NZIFRS).
State the objective of general purpose financial reports.
1. State the objective of general purpose financial reports.
2. State two examples of users/stakeholders who may be dependent on a reporting entitys
general purpose financial reports.
3. Explain a reason for each users/stakeholders interest in the general purpose financial
reports.
4. Explain why users may also be interested in non-financial and supplementary information
included in an entitys annual report.
5. Explain NZ GAAP.
6. Explain the purpose of NZIFRS in the preparation of general purpose financial reports.
Check your answers.
r
n
z
f
b
r
i
c
h
m
o
n
d
n
z
t
b
a
,

p
h
o
t
o
:

t
r
i
s
h

d
u
n
e
l
l
n
z
m
s
c
1B
10 AC3004
new zealands financial reporting
framework
2
learning intention
To describe statutory reporting requirements for reporting entities.
success criteria
describe the purpose and objectives of financial reporting
explain the financial reporting framework in New Zealand
apply the statutory reporting requirements.
introduction
In the previous lesson, you learnt the features of reporting entities. In this lesson, you will
learn about the current financial reporting framework. This reporting framework sets out what
reporting entities are legally obliged to report.
the purpose and objectives of financial reporting
Key point
The purpose of financial reporting for reporting entities is to assist stakeholders
shareholders, creditors, employees, local communities and society (including the environment)
in making decisions about where to invest their resources.
The current financial reporting framework sets out which entities have a legal obligation to:
prepare annual financial statements in accordance with generally accepted accounting
principles (GAAP)
file annual financial statements with the New Zealand Companies Office and make them
publicly available
obtain an independent audit opinion on the truth and fairness of the financial statements.
We started this course by defining accounting in booklet 1, AC3001, as:
... a subject that measures, records, reports and interprets both financial and
non-financial information about an entity enabling communication to take
place between the preparer and user of such information so that informed
decisions can be made.
You might ask: Why are there legal obligations on reporting entities to report financially?
The reason for this is that, unlike sole traders and partnerships, the resource providers for reporting
entities are often quite separate from the management of the reporting entity. As they are not on the
management board, they cannot ask for financial reports to be prepared for their special purpose.
Resource providers also have constrained influence on the management of the reporting entity.
11
AC3004
new zealands financial reporting framework
For example, Harry is a shareholder who holds 1,000 shares in Air New Zealand. Although the
number of shares held by Harry may be a significant investment for him, it is certainly not a
significant figure given the total number of Air New Zealand shares on issue. Since Harry is not a
major shareholder, he has very little influence on what the management of the company does.
Look at the table below.
major shareholders air new zealand 2011
Shareholders Ordinary Shares Percentage
New Zealand Government* 804,191,058 73.36%
Other Investors 291,984,013 26.64%
Total Ordinary Shares on Issue 1,096,175,071 100.00%
As the owner of 1,000 shares, Harry, as an individual shareholder,
has very little influence on how Air New Zealand, the reporting
entity, should be managed. In other words, he has a very
constrained influence. Harry is, however, one of the stakeholders
that rely on Air New Zealands financial statements for all decisions
he makes about his 1,000 shares.
On the other hand, Air New Zealand as a reporting entity is
accountable to all its shareholders the Government and all other
individual holders of the total 1,096,175,071 shares on issue.
Key point
It is important that financial information provided to stakeholders shows a true and fair
view of the reporting entity so informed and accurate decisions can be made. In order for a
true and fair view to be shown, it is important that the reporting entity comply with the New
Zealand International Financial Reporting Standards (NZIFRSs).
Harry owns 1,000 of the
total 1,096,071 Air New
Zealand shares on issue.
w
w
w
.
a
i
r
n
e
w
z
e
a
l
a
n
d
.
c
o
.
n
z
/
s
h
a
r
e
s
-
o
n
-
i
s
s
u
e

b
i
g
s
t
o
c
k
12
AC3004
the failure of a large privately held company can have a significantly adverse
impact on society. A key principle of Government policy is to require economically
significant entities to both prepare General Purpose Financial Reports (GPFR) and
have these reports audited
www.grantthornton.co.nz/assets/documents/pubseminars/fra-april-2012.pdf
Read this quote from an article about changes to the New Zealands financial reporting framework,
and in your own words, describe:
1. What is meant by significantly adverse impact on society?
2. What this new policy might mean for the wide range of stakeholders.
3. What this new policy might mean for reporting entities.
Check your answers.

financial reporting framework: standard setting arrangements
2A
NZIFRSs?
What are these?
Who makes the
rules on these?
i
s
t
o
c
k
NZASB
New Zealand Accounting
Standards Board
NZAuASB
New Zealand Auditing and
Assurance Standards
Government
XRB
External Reporting Board
Profession
NZICA
NZ Institute of Chartered
Accountants
Technical committees
Sector interest groups
13
AC3004
The framework for financial reporting in New Zealand is the structure that establishes and
oversees requirements for external financial reporting by entities.
It covers:
types of entities that must comply with the financial reporting requirements
financial statements that must be prepared
principles that must be adopted in preparing financial statements
requirements for disclosure, presentation and information regarded relevant to users.
The diagram on the previous page depicts the standard setting arrangements for financial reporting.
Let us look closer at the role that each organisation plays in the standard setting process.
external reporting board (xrb)
The XRB is an independent Crown Entity responsible for developing and issuing New Zealands
financial reporting standards.
Its statutory functions are:
financial reporting strategy
accounting standards
auditing and assurance standards
liaising with international counterparts.
How does the XRB carry out these functions?
The XRB:
governs the organisation
establishes the financial reporting strategy
appoints and oversees both the standard boards (NZASB and NZAuASB)
oversees due process.
The XRB does all of the above with an underlying philosophy of:
user-needs focus (the XRB has a clear mandate to focus on the needs of all stakeholders, for
instance shareholders, creditors, employees, local communities and society, including the
environment).
user tiers to match costs and benefit (the XRB intends that the costs of producing financial
reports should not outweigh the benefits to the various users of the reports).
14
AC3004
new zealand accounting standards board (nzasb)
The NZASBs strategic objective is:
To establish accounting standards for general purpose financial reporting which
will encourage the preparation of financial reports that engenders confidence in
New Zealand financial reporting, assists entities to compete internationally, and
enhances entities accountability to stakeholders.
www.xrb.govt.nz/site/about_us/nzasb_board/default.aspx
Therefore the NZASB is responsible for:
developing and issuing accounting standards for entities preparing General Purpose Financial
Reports.
new zealand auditing and assurance standards board (NZAuASB)
The NZAuASB is a sub-board of the XRB. Its strategic objective is:
To establish auditing and assurance standards which will encourage assurance
providers to behave and provide assurance in a manner that engenders confidence
in New Zealand financial reporting, assists entities to compete internationally, and
enhances entities accountability to stakeholders.
www.xrb.govt.nz/site/about_us/nzauasb_board/default.aspx
Therefore the NZAuASB is responsible for:
developing and issuing auditing and assurance standards for assurance providers required to
use those standards.
i
s
t
o
c
k
15
AC3004
the new zealand institute of chartered accountants (NZICA)
NZICA encompass everything from quality assurance, advocacy and regulation, to leadership
training, skills workshops, a comprehensive library and ongoing professional support.
NZICA strives to:
ensure that the quality, expertise and integrity of their members meet the highest standards,
so businesses and individuals can be assured that they are working with the best and
brightest accounting professionals
deliver the professional education and training people need to achieve a NZ Institute of
Chartered Accountants designation, and provide the continuing professional development
required to maintain the high standards of those designations
work on behalf of New Zealanders to advocate for sound public policy in the financial,
regulatory and taxation areas. Internationally, we advocate for New Zealands interests
through our membership of international accountancy bodies.
www.nzica.com/about-us/who-we-are-and-what-we-do/our-mission.aspx
i
s
t
o
c
k
Oh my ... what
does all this
mean?
i
s
t
o
c
k
16
AC3004
summary of the financial reporting framework
This is certainly a lot of new learning. How can all this information be put into simple terms?
You have been made aware that there is a wide range of stakeholders for reporting entities; and
when reporting entities fail, especially the economically significant entities, this affects society as
a whole.
To minimise the chance of reporting entities failing, and to have full accountability, it is necessary
to have a set of standards to make sure that financial reports are:
cost effective for the entity preparing the financial reports
clear for users interpreting the financial reports
consistent across time frames, entities and countries preparing financial reports
coherent understood by the users of the financial reports.
The NZIFRS are a set of standards/guidelines developed to ensure financial reports contain these
four key qualities.
The NZIFRS are standards and interpretations approved by the XRB.
Cost effective
Consistent
Financial
Reporting
Framework
Coherent Clear
17
AC3004
1. One of the underlying philosophies of the XRB is ensuring that costs and benefits are matched
when entities financially report. Describe in your own words what this means.
2. Why would the New Zealand Accounting Standards Board want to encourage confidence in
New Zealand financial reporting?
3. What would be the consequence for New Zealand if this confidence was lost?
4. How does the auditing of financial reports enhance accountability to stakeholders?
5. Describe the role of NZICA in the development of the New Zealand International Financial
Reporting Standards.
Check your answers.
the new statutory framework for financial reporting
On 14 September 2011, the Government announced its proposed reforms to the statutory financial
reporting framework. At the same time, the External Reporting Board (XRB) released its proposed
accounting standards framework that will apply to reporting entities under the new stator
reporting framework. The new statutory framework for profit entities is shown on the next page.
To set out generally accepted
accounting practices or the rules for
general purpose financial reporting
in New Zealand.
What is the purpose
of all the NZIFRSs?
Its so that reporting entities
can prepare financial statements that comply
with the Financial Reporting Act and fairly
reflect an entitys performance, financial
position and cash flows.
w
w
w
.
b
n
z
.
c
o
.
n
z
/
i
b
/
a
p
p
/
l
o
g
o
u
t
,

i
s
t
o
c
k
2B
18
AC3004
the (new) statutory framework
Publicly accountable entities are defined by the International Accounting Standards Board
(IASB) definition. An entity is publicly accountable if:
1. its debt or equity is traded in a public market or is in the process of issuing such instruments
2. it holds assets in a fiduciary capacity for a broad group of outsiders as one of its
primary businesses.
In all instances the following for-profit entities (as defined by legislation) are deemed to be
publicly accountable and therefore in tier 1:
issuers
registered banks
deposit takers
registered superannuation schemes.
For-profit entity
GPFR reporting
requirement
Tier 1:
Publicly accountable
entities/issuers
GPFR prepared must:
Apply full NZIFRS
Be audited
Be publicly
available
Tier 2:
Large for profit
companies
GPFR prepared must:
Apply NZIFRS but
with RDR
Be audited
Be publicly
available
Tier 2:
Non-large for profit
companies with 10 or
more shareholders
GPFR prepared must:
Apply NZIFRS but
with RDR (but can
opt out)
Be audited (but can
opt out)
Distribute (to
owners/members)
Special Purpose
Financial Reporting
(SPFR)
usually prepared for
Inland Revenue and
banks
No GPFR
requirement
Fiduciary capacity means there
is a duty of care.
19
AC3004
A for-profit entity will be classified as large if it exceeds $30 million revenue per year or $60
million assets per year. The large criteria will be used to determine the statutory financial
reporting requirements of privately held companies at the entity and group level.
Reduced disclosure regime (RDR)
RDR provides for a significant reduction in required GPFR disclosure requirements.
Opt-out rules
A shareholder motion is required for non-publicly accountable for profit entities, which are not
large, to opt-out of GPFR preparation and audit requirements. The opt-out would succeed if 95%
of the voting shares cast on the motion supported the proposal (required on an annual basis).
statutory requirements
Tier 1
From the (new) Statutory Framework 2011 diagram, tier 1 reporting entities that are publicly
accountable (i.e. owned or funded directly by the public) have a statutory requirement to
prepare GPFR with full application of NZIFRS. These GPFR are required to be audited and made
publically available.
An example of a reporting entity in tier 1 would be Westpac Bank, a registered bank.
i
s
t
o
c
k
i
s
t
o
c
k
20
AC3004
Tier 2
Large for-profit companies are considered to be economically significant as they have annual
revenue of greater than $30 million or total assets of greater than $60 million. These large for-
profit companies have a statutory requirement to prepare GPFR but not complete full application
of NZIFRS. They are able to have a reduced disclosure regime, especially if the benefit is not
outweighing the compliance cost of applying full NZ IFRS to their GPFR. These entities are
required to have their GPFR audited and made publically available.
An example of a reporting entity in tier 2 would be Air New Zealand.
Tier 3
Non-large for-profit companies with 10 or more shareholders are considered to have a significant
degree of separation between management and owners or members of the entity. Because of
this, these entities have a statutory requirement to prepare GPFR but can opt-out of the full
application of NZIFRS.
You can see from the definitions above that an opt-out would require 95% of shareholders to
cast a vote for such a motion (annually). These tier 3 entities can also opt out of an audit, but are
required to distribute their GPFR to owners or members.
An example of a reporting entity in this tier would be a small company such as Burger Fuel.
Key point
In New Zealand, most of the for-profit entities are small, and therefore do not fit into tier 1,
2 or 3. You only have to look around your neighbourhood to see all the small businesses that
operate. Although they are not required to prepare general purpose financial reports, it is
important that they do prepare special purpose financial reports so they are able to make
informed financial decisions. It would be very costly for the local dairy if they continued to
order a supply of good they could not sell.
Special purpose financial reports are financial reports tailored to meet the specific
information needs of a particular user. For example, if an entity needs to apply to a bank for
a loan so they can expand the business, they could prepare special purpose financial
reports, so the bank could assess whether the business would be able to repay a loan.
i
s
t
o
c
k
21
AC3004
1. Explain the reporting obligations of the following
entities under the (new) Statutory Framework 2011.
a. Supertyres Limited has equity of $2m. The
shares are held by Gary and Merv Robinson
who manage the company. Average annual
income is approximately $18m.
b. Footwear Distributors Limited has issued
shares of $150m to the public. The business
has assets of $160m and annual income of
$180m.
2. Explain how the (new) Statutory Framework 2011
helps small for-profit companies that do not issue shares to the public, save money.
Check your answers.
i
s
t
o
c
k
2C
22 AC3004
general purpose financial reports 3
learning intention
To describe general purpose financial statements and accounting policies.
success criteria
identify general purpose financial reports
describe the (new) New Zealand Framework 2011 and the Conceptual Framework
explain generally accepted accounting practice (GAAP)
explain the underlying assumption and the measurement bases used in the preparation of
financial reports.
introduction
From the previous lesson, you now know that the financial reporting framework is the structure
that establishes and oversees the requirements for external financial reporting by entities in
New Zealand. In this lesson, you will learn about the general purpose financial reports that these
reporting entities are obliged to prepare.
general purpose financial reports
Reporting entities are required by the Financial Reporting Act 1993 to provide general purpose
financial reports for users and providers of resources to the entity.
Some entities can opt out of the general purpose financial reporting requirements. These entities
were identified under the (new) Statutory Framework 2011 in lesson 2.
The Financial Reporting Act 1993
The Financial Reporting 1993 requires New Zealand reporting entities to produce general
purpose financial reports prepared in accordance with generally accepted accounting
practices (GAAPs).
Reporting entities are companies, government departments, Crown entities, local
governments and other not-for-profit entities including trusts and charities.
General purpose financial reports include statements such as the Statement of
Comprehensive Income, Statement of Financial Position, Statement of Cash Flows and
notes to the financial statements.
Generally accepted accounting practices indicate the rules for recognising, measuring
and disclosing transactions in general purpose financial reporting.
In later booklets you will be preparing general purpose financial reports for entities. Meanwhile,
here is a brief summary of what each financial statement includes.
23
AC3004
statement of comprehensive income
Key point
The purpose of a Statement of Comprehensive Income is to disclose the profit (loss) for a
given period and the components of the profit, that is, revenue less expenses.
The Statement of Comprehensive Income must disclose:
revenue
finance costs
inventory write downs
loss or gain on disposal of property, plant
and equipment
loss or gain on disposal of investments
auditors fees broken into fees/advice etc
total directors fees
donations
depreciation
bad debts/doubtful debts
tax expense
profit or loss for the period.
statement of financial position
Key point
The purpose of a Statement of Financial Position is to disclose the entitys asset, liabilities
and equity, and the relationship of these elements to each other at a point in time.
The Statement of Financial Position must disclose:
current assets
non-current assets
current liabilities
non-current liabilities
equity
appropriate notes.
i
s
t
o
c
k
i
s
t
o
c
k
24
AC3004
statement of cash flows
Key point
The purpose of a Statement of Cash Flows is to provide information about the historical
changes in cash, that is, the entitys bank account. The Statement of Cash Flows reflects
an entitys cash receipts and its cash payments during a period. This provides useful
information about an entitys activities in generating cash through operations to repay debt,
distribute dividends or reinvest to maintain or expand operating capacity.
The Statement of Cash Flows separately discloses the cash flows classified by major sources and
uses from:
operating activities
investing activities
financing activities.
notes to the financial statements (accounting policies)
Key point
The purpose of the Statement of Accounting Policies is to inform the users of the general
purpose financial reports the accounting policies adopted in the preparation of those
financial reports. This allows users to understand the significance of the information
contained in the general purpose financial reports.
The Statement of Accounting Policies must disclose:
identification of the entity reporting by name and nature (including the statutory base,
registered under the Companies Act 1993)
the measurement basis (or bases) used in preparing the financial statements
the other significant accounting policies used that are relevant to an understanding of the
financial statements
m
y
c
h
i
l
l
y
b
i
n
25
AC3004
a statement of changes in accounting policy only if the change is required by a standard or
results in the financial statements providing reliable and more relevant information about the
effects of transactions on the entitys financial statements. A change in depreciation per cent
or doubtful debts per cent is a change in estimate, not a change in accounting policy.
The (new) New Zealand Framework 2011 states that the overall objective of general purpose
financial reports is to provide financial information about the reporting entity that is useful to
existing and potential investors, lenders and other creditors in making decisions about providing
resources to the entity.
This objective is achieved by publishing reports which assist users to assess an entitys:
financial position
financial performance
cash flows.
Changes happening in the New Zealand Framework
The International Accounting Standards Board (IASB) is currently in the process of updating
its conceptual framework. This conceptual framework project is conducted in phases.
As a chapter is finalised by the IASB, the relevant paragraphs in the NZ Framework will be
replaced. When the IASBs conceptual framework project is completed, the IASB will have
a complete, comprehensive and single document called the Conceptual Framework for
Financial Reporting.
This version of the NZ Framework includes the first two chapters the IASB published as a
result of its first phase of the conceptual framework project.
n
e
w

z
e
a
l
a
n
d

f
r
a
m
e
w
o
r
k

2
0
1
1
,

f
o
r
e
w
o
r
d
,

p
a
g
e

5
The (new) New Zealand Framework 2011
replaces the Conceptual Framework.
Once finalised, the (new) New Zealand
Framework 2011 is likely to be called
the Conceptual Framework for
Financial Reporting.
26
AC3004
purpose of the international accounting standards
boards (iasb) framework
The IASBs Conceptual Framework sets out the concepts that underlie the preparation and
presentation of financial statements for external users. The purpose of the IASBs Conceptual
Framework is to:
assist the IASB in the development of future IFRSs and in its review of existing IFRSs
assist the IASB in promoting harmonisation of regulations, accounting standards and
procedures relating to the presentation of financial statements by providing a basis for
reducing the number of alternative accounting treatments permitted by IFRSs
assist national standard-setting bodies in developing national standards
assist preparers of financial statements in applying IFRSs and in dealing with topics that have
yet to form the subject of an IFRS
assist auditors in forming an opinion on whether financial statements comply with IFRSs
assist users of financial statements in interpreting the information contained in financial
statements prepared in compliance with IFRSs
provide those who are interested in the work of the IASB with information about its approach
to the formulation of IFRSs.
status of the new zealands conceptual framework
The IASBs Conceptual Framework is not an IFRS and therefore does not define standards for
any particular measurement or disclosure issue. Nothing in the IASBs Conceptual Framework
overrides any specific IFRS.
The IASB recognises that in a limited number of cases there may be a conflict between the IASBs
Conceptual Framework and an IFRS. In those cases where there is a conflict, the requirements of
the IFRS prevail over those of the Conceptual Framework.
scope of the iasbs conceptual framework
The IASBs Conceptual Framework covers:
the reporting entity
the object of general purpose financial reporting
the underlying assumption in the preparation of financial statements
qualitative characteristics of useful financial information
the definition, recognition and measurement of the elements which make up the financial
statements.
I
A
S
B
FRAM
EW
ORK
i
s
t
o
c
k
27
AC3004
1. Describe briefly the requirements of the Financial Reporting Act 1993.
2. What is the purpose of the New Zealands Conceptual Framework?
3. In your own words, briefly describe why a complete, comprehensive and single document
called the Conceptual Framework for Financial Reporting would be considered better than a
separate conceptual framework for New Zealand.
4. What is the status of the IASBs Conceptual Framework in relation to financial reporting
standards?
5. Explain how New Zealand equivalents to International Reporting Standards help to ensure
that the general purpose financial statements fairly reflect the businesss performance,
financial position and cash flows.
Check your answers.
importance of a reporting entitys accountability
By now you will be aware that a reporting entity is accountable to a wide range of users. Unlike
partnerships and sole traders, there is often a separation of ownership and management.
Reporting entities are often economically significant, that is large in size, and therefore if they fail
there is a considerable impact to society. You only have to search the newspapers to read the
horrific impacts that the failures of the large finance companies have had on New Zealanders
over the last few years. Investors, shareholders, general public, members, donors, taxpayers and
ratepayers are all affected when an economically significant reporting entity fails.
To ensure that users needs are met, the financial reporting framework ensures that reporting
entities prepare annual financial statements in accordance with Generally Accepted Accounting
Principles (GAAP).
3A
i
s
t
o
c
k
PROVOST JUM
PS INTO
POLITICAL SHARKS TANK
Auditor-General Lyn Provost and Prime Minister
John Key may find themselves at loggerheads over
just who is really to blame for the $1.78 billion the
taxpayer stumped up to bail out depositors in the
failed South Canterbury Finance.
www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10749902
28
AC3004
generally accepted accounting practice
Generally accepted accounting practice (GAAP) is the term used to describe the basis on which
general purpose financial statements are normally prepared. The term encompasses:
specific rules, practices and procedures relating to particular circumstances; and
broad concepts and principles of general application.
Key point
Reporting entities that comply with New Zealand generally accepted accounting practices
(NZ GAAP) prepare their financial statements based on New Zealand International Financial
Reporting Standards (NZIFRS), which outline rules and procedures for reporting the effects
of transactions and other events in the financial statements. If all companies follow the
same standards when reporting financial elements in their financial statements, the financial
statements are able to be compared from one entity to another they have the enhancing
qualitative characteristic of comparability.
independent audit report
Opinion on the financial statements
In our opinion the financial statements of the Company and Group on pages 2 to 52:
comply with generally accepted accounting practice in New Zealand;
comply with International Financial Reporting Standards; and
give a true and fair view of the Company and Groups:
financial position as at 30 June 2011; and
financial performance and cash flows for the year ended on that date.
www.airnewzealand.co.nz/assets/pdfs/2011-airnz-annual-financial-report.pdf
Read this extract from the independent audit report for Air New Zealands financial results for the
year 2011.
1. Describe what is meant by true and fair view.
2. Explain how Air New Zealand ensures its financial
statements give a true and fair view.
Check your answers.
3B
b
i
g
s
t
o
c
k
29
AC3004
underlying assumption and concepts of financial
statements
Before we start to look at the qualitative characteristics and financial elements in the financial
statements, let us look at the underlying assumption and other concepts that the financial
statements are prepared upon.
underlying assumption: the entity is a going concern
Going concern
The financial statements are normally prepared on the assumption that an entity is a going
concern and will continue in operation for the foreseeable future. Hence it is assumed that
the entity has neither the intention nor the need to liquidate or curtail materially the scale
of its operations; if such an intention or need exists, the financial statements may have to be
prepared on a different basis and, if so, the basis used is disclosed.
New Zealand Framework 2011, Chapter 4, paragraph 1
From your previous study of accounting you will recognise some other important accounting
concepts that are discussed in the NZ Framework with regards to the preparation of the financial
statements.
accrual accounting
Accrual accounting depicts the effects of transactions and other events and circumstances
on a reporting entitys economic resources and claims in the periods in which those effects
occur, even if the resulting cash receipts and payments occur in a different period. This is
important because information about a reporting entitys economic resources and claims
and changes in its economic resources and claims during a period provides a better basis
for assessing the entitys past and future performance than information solely about cash
receipts and payments during that period.
New Zealand Framework 2011, Chapter 1, aob17
Financial statements based on accrual accounting report past transactions as well as inform
users of the entitys obligation to pay cash in the future. For example, accounts payable and
accrued expenses; and resources that represent cash to be received in the future, such as
accounts receivable and accrued income.
30
AC3004
reporting period
The NZ Framework does not include the reporting period as an assumption, but NZ IAS 1 requires
reporting entities to present financial statements annually.
The entitys continuing life is divided into nominated time periods in order to measure financial
performance and position on a regular basis and to allow for comparisons from one period to the next.
NZ IAS 1 requires:
general purpose financial statements to be prepared annually
the period covered by the financial statements must be disclosed on each statement.
1. Name the financial statements that make up general purpose financial reports.
2. State two objectives of general purpose financial statements.
3. Explain how the going concern concept is applied when preparing financial statements.
4. Give two examples of accrual accounting in financial statements.
Check your answers.
measurement bases
Measurement bases
Measurement is the process of determining the monetary amounts at which the elements of
the financial statements are to be recognised and carried in the balance sheet and income
statement. This involves the selection of the particular basis of measurement.
NZ Framework, Chapter 4, paragraph 54
3C
31
AC3004
Different measurement
A number of different measurement bases are employed to different degrees and in varying
combinations in financial statements. They include the following:
Historical cost: Assets are recorded at the amount of cash or cash equivalents paid or
the fair value of the consideration given to acquire them at the time of their acquisition.
Liabilities are recorded at the amount of proceeds received in exchange for the obligation,
or in some circumstances (for example, income taxes), at the amounts of cash or cash
equivalents expected to be paid to satisfy the liability in the normal course of business.
Current cost: Assets are carried at the amount of cash or cash equivalents that would have
to be paid if the same or an equivalent asset was acquired currently be obtained by selling
the asset in an orderly disposal. Liabilities are carried at their settlement values; that is
the undiscounted amounts of cash or cash equivalents expected to be paid to satisfy the
liabilities in the normal course of business.
Reliable (settlement) value: Assets are carried at the amount of cash or cash equivalents
that could currently be obtained by selling the asset in an orderly disposal. Liabilities
are carried at their settlement values; that is the undiscounted amounts of cash or cash
equivalents expected to be paid to satisfy the liabilities in the normal course of business.
Present value: Assets are carried at the present discounted value of the future net cash
inflows that the item is expected to generate in the normal course of business. Liabilities are
carried at the present discounted value of the future net cash outflows that are expected to
be required to settle the liabilities in the normal course of business.
The measurement basis most commonly adopted by entities in preparing their financial
statements is historical cost. This is usually combined with other measurement bases.
For example, inventories are usually carried at the lower of cost and net realisable value,
marketable securities may be carried at market value and pension liabilities are carried at
their present value. Furthermore, some entities are the concurrent cost basis as a response
to the inability of the historical cost accounting model to deal with the effects of changing
prices of non-monetary assets.
New Zealand Framework 2011, Chapter 4, paragraph 56
32
AC3004
Key point
It is really important that you are able to explain the underlying assumption and other
concepts that the financial statements are prepared upon in the context given. A definition
alone is unlikely to receive a grading.
Example
Explain, in terms of accrual accounting, why an expense recognised for an insurance amount
in a comprehensive income statement would include an amount already paid for insurance
and an amount payable for insurance.
A possible answer would read:
Amounts paid and payable are for insurance used in the current accounting period, so the
two make up the insurance expense for this current period. Even though the entire insurance
amount has not been paid in cash, the entire insurance amount has been used by the entity
in the current period so is reported as an expense in that period.
An answer such as this does more than just state the definition of accrual accounting it
demonstrates to the marker your understanding of accrual accounting.
High Tech industries use the cost model to value plant and equipment and current cost to value
its land and buildings each accounting period. At 30 March 2014, the carrying value of land was
$250,000 and buildings $200,000.
A current valuation from a qualified valuer shows the market value of land is $350,000 and
buildings $260,000.
1. What value will be shown in the Statement of Financial Position for both land and buildings?
2. High Tech Industries is planning to expand its operations. This will entail borrowing. Explain
the benefit to High Tech Industries of using current cost as a measurement base for its assets
when it attempts to raise a loan.
Check your answers.
3D
i
s
t
o
c
k
33 AC3004
qualitative characteristics 4
learning intention
To describe the qualitative characteristics and the constraints on them.
success criteria
describe fundamental and enhancing qualitative characteristics
explain the conflict between fundamental and enhancing qualitative characteristics
describe the balance between benefit and cost.
introduction
In this lesson you will start to identify the types of information that are likely to be most useful to
users for making decisions about the reporting entity on the basis of information in their financial
statements.
qualitative characteristics of useful financial
information
The NZ Framework recognises qualitative characteristics which measure the quality of the
information presented in financial statements.
As can be seen from the diagram on the following page, if the financial information in the general
purpose financial reports is to be useful for decision-making then it must be relevant and
faithfully represent what it purports to represent. The usefulness of financial information is
enhanced if it is comparable, verifiable, timely and understandable.
i
s
t
o
c
k
34
AC3004
qualitative characteristics

P
r
e
d
i
c
t
i
v
e

v
a
l
u
e
M
a
t
e
r
i
a
l
i
t
y
N
e
u
t
r
a
l
C
o
n
f
i
r
m
a
t
o
r
y

v
a
l
u
e
V
e
r
i
f
i
a
b
i
l
i
t
y
C
o
m
p
a
r
a
b
i
l
i
t
y
C
o
m
p
l
e
t
e
U
n
d
e
r
s
t
a
n
d
a
b
i
l
i
t
y
T
i
m
e
l
i
n
e
s
s
F
r
e
e

f
r
o
m

m
a
t
e
r
i
a
l

e
r
r
o
r
Q
u
a
l
i
t
a
t
i
v
e

c
h
a
r
a
c
t
e
r
i
s
t
i
c
s
F
u
n
d
a
m
e
n
t
a
l
E
n
h
a
n
c
i
n
g
F
a
i
t
h
f
u
l

r
e
p
r
e
s
e
n
t
a
t
i
o
n
R
e
l
e
v
a
n
c
e
35
AC3004
Before financial information can be enhanced there are two characteristics that financial
information must have. They are:
relevance
faithful representation.
Relevance and faithful representation are known as the fundamental qualitative characteristics.
They are like the foundation of financial information. If financial information is not relevant
and faithfully represented then this information is not enhanced. Fundamental and enhancing
qualitative characteristics complement each other but they do not stand alone.
Let us begin by defining the fundamental qualitative characteristics according to the New
Zealand Framework.
fundamental qualitative characteristics
Relevance
Relevant financial information is capable of making a difference in the decisions made by
users. Information may be capable of making a difference in a decision even if some users
choose not to take advantage of it or are already aware of it from other sources.
Financial information is capable of making a difference in decisions if it has predictive value,
confirmatory value or both.
Financial information has predictive value if it can be used as an input to processes
employed by users to predict future outcomes. Financial information need not be a
prediction or forecast to have predictive value. Financial information with predictive value is
employed by users in making their own predictions.
Financial information has confirmatory value if it provides feedback about (confirms or
changes) previous evaluations.
The predictive value and confirmatory value of financial information are interrelated.
Information that has predictive value often also has confirmatory value. For example,
revenue information for the current year, which can be used as the basis for predicting
revenues in future years, can also be compared with revenue predictions for the current year
that were made in past years. The results of those comparisons can help a user to correct
and improve the processes that were used to make those previous predictions.
Materiality
Information is material if omitting it or misstating it could influence decisions that users
make on the basis of financial information about a specific reporting entity. In other words,
materiality is an entity-specific aspect of relevance based on the nature or magnitude, or
both, of the items to which the information relates in the context of an individual entitys
financial report.
New Zealand Framework 2011, Chapter 3, AQC6 AQC11
36
AC3004
How are these qualitative characteristics applied to general purpose financial reporting? Look at
the example below.
Example
In 2011, New Zealand hosted the Rugby World Cup. This was a major event for New Zealand. Prior
to hosting this event, a number of construction firms signed contracts to upgrade sports stadiums.
Mammoth Construction Ltd was one of these firms that in 2009 signed a two-year contract to
upgrade Mt Eden Stadium, in Auckland. In 2009, Mammoth Construction Ltd included a note in their
general purpose financial reports explaining the future capital expenditure commitments involved in
completing this construction contract, as well as any penalty clauses for late completion.
Stop! Think, and then try to answer the question below.
With reference to relevance and materiality above why do you think that the note was included
in Mammoth Construction Ltds financial reports in 2009?
The note was included in Mammoth Construction Ltds financial reports in 2009 because the future
capital expenditure commitments outline Mammoth Construction Ltds intended purchasing of new
assets, such as more construction vehicles, with their accompanying costs in order to complete the
upgrade of the sports stadium in time for that Rugby World Cup in 2011.
The disclosure of Mammoth Construction Ltds future capital expenditure commitments in 2009
was relevant to the decision-making of the companys users because this would have assisted the
users in 2009 to predict:
whether Mammoth Construction Ltd was able to finance the purchase of the additional
assets within budget
whether Mammoth Construction Ltd was likely to meet the future contractual obligation of
upgrading the stadium on time and not incur any penalty costs for late completion.
i
s
t
o
c
k
37
AC3004
As you have read above materiality is also a component of relevance. This disclosure note in the
financial reports was material because:
the significantly large amount of capital outlay required by Mammoth Construction Ltd in
upgrading Mt Eden stadium would have influenced users decisions on the future financial
stability of Mammoth Construction Ltd
the nature of signing a construction contract with penalty clauses for late completion would
have influenced users decisions by causing them to consider whether Mammoth Construction
Limited was likely to complete the contract in time and what the predicted penalty cost would
be if the company finished the upgrade of the sports stadium outside the two-year period.
faithful representation
Financial reports represent economic phenomena in words and numbers. To be useful,
financial information must not only represent relevant phenomena, but is must also
faithfully represent the phenomena that it purports to represent. To be a perfectly faithful
representation, a depiction would have three characteristics. It would be:
complete
neutral
free from error.
A complete depiction includes all information necessary for a user to understand the
phenomenon being depicted, including all necessary description and explanations. For
example, a complete depiction of a group of assets would include, at a minimum, a description
of the nature of the assets in the group, a numerical depiction of all of the assets in the group,
and a description of what the numerical depiction represents (for example, original cost,
adjusted cost or fair value).
A neutral depiction is without bias in the selection or presentation of financial information.
A neutral depiction is not slanted, weighted, emphasised, de-emphasised or otherwise
manipulated to increase the probability that financial information will be received favourably
or unfavourable by users. Neutral information does not mean information with no purpose or
no influences on behaviour. On the contrary, relevant financial information is, by definition,
capable of making a difference in users decisions.
An independent survey has rated Ring-a-ding Ltd as the best performing mobile
phone company in New Zealand. Because of this acknowledgement, the directors
wanted to include an amount for goodwill in their financial reports.
1. Explain fully why the directors wanted to include an amount for goodwill in their
financial reports, in terms of relevance.
2. Using the qualitative characteristic of faithful representation, explain fully why
the amount of goodwill may or may not be complete, neutral and free from error.
Check your answers.
4A
i
s
t
o
c
k
38
AC3004
enhancing qualitative characteristics
Comparability, verifiability, timeliness and understandability are qualitative characteristics that
enhance the usefulness of information that is relevant and faithfully represented. The enhancing
qualitative characteristics may also help determine which of two ways should be used to depict a
phenomenon if both are considered equally relevant and faithfully represented.
comparability
Users decisions involve choosing between alternatives, for example, selling or holding an
investment, or investing in one reporting entity or another. Consequently, information about
a reporting entity is more useful if it can be compared with similar information about other
entities and with similar information about the same entity for another period or another date.
Comparability is the qualitative characteristic that enables users to identify and understand
similarities in, and differences among, items. Unlike the other qualitative characteristics,
comparability does not relate to a single item. A comparison requires at least two items.
Ring-a-ding Ltd, the best performing mobile phone company in New Zealand according to a recent
independent published survey, wants to expand their company and offer other types of technology
to their customers. This will require them to extend their factory. As part of a loan application to
finance this project, Ring-a-ding Ltd included the 2014 and 2015 comprehensive income statement.
1. State the qualitative characteristic that Ring-a-ding Ltd is following by including both the
2014 and 2015 comprehensive income statement in their loan application.
2. Explain why the bank manager would be interested in viewing both the 2014 and 2015
comprehensive income statement figures.
Check your answers.
verifiability
Verifiability helps assure users that information faithfully represent the economic
phenomena it purports to represent. Verifiability means that different knowledgeable
and independent observers could reach consensus, although not necessarily complete
agreement, that a particular depiction is a faithful representation.
New Zealand Framework 2011, Chapter 3, AQC26
A good example of verifying financial information is annual stock takes carried out by trading
firms. Usually once or twice a year a trading firm, such as a supermarket, physically counts their
stock and verify this figure with the computer-generated end inventory figure. Re-calculations are
made where necessary.
4B
39
AC3004
timeliness
Timeliness means having information available to decision-makers in time to be capable
of influencing their decisions. Generally, the older the information is the less useful it is.
However, some information may continue to be timely long after the end of a reporting
period because, for example, some users may need to identify and assess trends.
New Zealand Framework 2011, Chapter 3, AQC29
understandability
Classifying, characterising and presenting information clearly and concisely makes it
understandable.
Some phenomena are inherently complex and cannot be made easy to understand. Excluding
information about those phenomena from financial reports might make the information in
those financial reports easier to understand. However, those reports would be incomplete and
therefore potentially misleading.
Financial reports are prepared for users who have a reasonable knowledge of business and
economic activities and who review and analyse the information diligently. At times, even
well-informed and diligent users may need to seek the aid of an adviser to understand
information about complex economic phenomena.
applying the enhancing qualitative characteristics
The enhancing qualitative characteristics do not stand alone. They complement the fundamental
qualitative characteristics of relevance and faithful representation.
At times this may mean that one or other enhancing qualitative characteristics may have to be
diminished in order to maximise another qualitative characteristic.
For example, it is expected that from 1 July 2013 for-profit reporting entities will have to comply
with the new for-profit reporting framework. This will see some changes in financial reporting
for these entities. There may be a temporary reduction in comparability as a result of these
entities applying the new reporting framework to their financial statements. However, this will be
worthwhile to improve the relevance or faithful representation in the longer term.
40
AC3004
balance between benefit and cost
According to the NZ Framework, the benefits gained from information should be greater than the
costs of providing it. It is difficult to measure benefits and costs, especially when the costs do not
always fall on the users who enjoy the benefits.
Financial analysis, for example, use financial reports but pay nothing towards their preparation
or publishing. On the other hand, the shareholders/owners of small companies may also be
managers who, having worked closely with sales, budgets and other management reports all
year, do not gain much further benefit from the financial statements.
Despite these difficulties, the NZ Framework insists that those who set financial reporting standards,
as well as preparers and users of financial information, should be aware of this principle.
1. State and explain which qualitative characteristic of good accounting information is satisfied
when:
a. Financial results from previous accounting periods are shown in the financial statements.
b. Notes to the financial statements are provided in the annual report.
2. An entity has taken two years to gather precise information on developing a new product line.
Discuss how the fundamental and enhancing qualitative characteristics are in conflict.
3. Smile with Style Limited has furniture and equipment with a total cost of $60,000. When the
entity buys new chairs costing $200 for their waiting room they treat this as an expense
rather than an asset in the accounting records. Explain why the entity is able to do this in
terms of materiality and relevance.
Check your answers.
4C
i
s
t
o
c
k
41 AC3004
financial elements 5
learning intention
To explain the financial elements.
success criteria
define assets, liabilities, equity, income and expenses
apply these definitions in context
define and apply the recognition criteria to each of the financial elements.
introduction
The New Zealand Framework identifies the financial elements that group the effects of
transactions and other financial events in the general purpose financial reports. In the Statement
of Financial Position the financial elements are assets, liabilities and equity. In the Income
Statement the financial elements are income and expenses.
assets
definition
An asset is a resource controlled by the entity as a result of past events and from which
future economic benefits are expected to flow to the entity.
Key point
Assets have three essential characteristics:
a result of past events
must be presently controlled by the entity
must represent future economic benefits.
Note the words in bold will help trigger your memory when you are trying to remember the
characteristics past, present, future.
These future economic benefits may flow to the entity in a number of ways. For example, an asset
may be:
used singly or in combination with other assets in the production of goods or services
exchanged for other goods
used to settle a liability, or
distributed to the owners of the entity.
42
AC3004
financial elements
For example, a delivery truck is owned by an entity
and its use is presently controlled by the entity.
It was purchased prior to reporting date and the
entity expects a flow of future economic benefits
as the truck is used to deliver its products and
generate revenue (cash) for the entity.
Key points
An asset is only recognised in the Statement of Financial Position when:
it is probable that the future economic benefit will eventuate
it possesses a value or cost that can be reliably measured.
current assets
An asset is classified as current when it satisfies any of the following criteria:
it is expected to be realised in, or is intended for sale or consumption in, the entitys normal
operating cycle (this may exceed 12 months)
it is held primarily for the purpose of resale
it is expected to be realised within 12 months after the reporting date, or
it is cash or a cash equivalent.
non-current assets
All other assets shall be classified as non-current. They include tangible, intangible and financial
assets of a long-term nature.
liabilities
definition
A liability is a present obligation of the entity arising from past events, the settlement of
which is expected to result in an outflow from the entity of resources embodying economic
benefits.
i
s
t
o
c
k
43
AC3004
financial elements
Key point
Liabilities have three essential characteristics:
A result of past events
The entity presently has a financial obligation
The settlement of which will require a future outflow of cash from the business.
A liability is only recognised in the Statement of Financial Position when it meets the
definition of a liability and:
it is probable that the future economic sacrifice will eventuate
the amount of the liability can be measured with reliability (a source document).
The settlement of a present obligation usually involves the entity giving up resources embodying
economic benefits in order to satisfy the claim of the other party. Settlement of a present
obligation may occur in a number of ways:
payment of cash
transfer of other assets
provision of services
replacement of obligation with another obligation; or
conversion of the obligation to equity.
For example, a loan is a liability because:
it is the result of a loan agreement with the bank made some time in the past
the business presently has an obligation to repay the loan to the bank
settlement of the loan involves an outflow of cash from the business bank account in the
future cash that could have been used to earn income for the business.
Recognition criteria for the loan:
It must be more than likely that there will be an outflow of cash from the business
(repayment is a condition of the loan agreement).
The amount required to settle the loan can be measured with reliability (it is stated in
the loan agreement).
current liabilities
A liability shall be classified as current when it satisfies any of the following criteria:
it is expected to be settled in the entitys normal operating cycle (this may exceed 12 months)
it is held primarily for the purpose of being traded
it is expected to be settled within 12 months after the reporting date, or
the entity does not have an unconditional right to defer settlement of the liability for at least
12 months after the reporting date.
44
AC3004
financial elements
non-current liabilities
All other liabilities shall be classified as non-current.
fair value
The New Zealand Framework emphasises that applying the definition and recognition criteria
to assets and liabilities will result in fair value.
Fair value is the overriding consideration.
equity
Key point
Equity is the residual interest in the assets of the entity after deduction of the liabilities.
In a partnership, for example, the partners equity is what is left of the assets after all liabilities
have been deducted.
recognition criteria
The recognition of assets and liabilities provides the criteria for the recognition of equity.
In other words, the amount at which equity is shown on the Statement of Financial Position is
dependent on the measurement of assets and liabilities.
The NZ Framework identifies income and expenses as the financial elements that group the effects
of transactions and other financial events in the Statement of Comprehensive Income.
income
definition
Income is increases in economic benefits during the accounting period in the form of inflows
or enhancements of assets or decreases of liabilities that result in increases in equity, other
than those relating to contributions from equity participants.
i
s
t
o
c
k
45
AC3004
financial elements
Key point
Income has three essential characteristics:
increases in economic benefits from an inflow of assets (or decreases in liabilities)
increases in equity (since profit increases)
not contributed by equity participants.
Income includes both revenue and gains. Revenue arises in the course of the ordinary activities
of the entity. It may be referred to by a variety of different names including sales, fees, interest,
dividends, royalties and rent.
Gains represent other items that meet the definition of income but may, or may not, arise from
the ordinary activities of the entity. The entity may for example make a gain when selling office
furniture. Gains also include unrealised gains such as those arising from the revaluation of
marketable securities or from increases in the carrying amount of non-current assets.
For decision-making purposes, gains are usually displayed separately in the Statement of
Comprehensive Income. Gains are often reported net of related expenses.
In an architectural partnership, fees are revenue. They are an increase in economic
benefits during the accounting period in the form of inflows of cash which result in
increases in profit and therefore in equity. They have not been contributed by any of the
partners in the practice.
Key points
Income is recognised in the Statement of Comprehensive Income when an increase in future
economic benefit related to an increase in an asset (or a decrease of a liability) has arisen that
can be measured reliably.
Income is recognised at the time there is an increase of assets from the sale of goods or
services, or a net decrease in liabilities arising from the waiver of a debt payable.
expenses
definition
Expenses are decreases in economic benefits during the accounting period in the form
of outflows or depletions of assets or incurrences of liabilities that result in decreases in
equity, other than those relating to distributions to equity participants.
46
AC3004
financial elements
Key point
Expenses have three essential characteristics. They are:
decreases in economic benefits from an outflow of assets (or increase in liabilities)
decreases in equity (since profit decreases)
not distributed to equity participants.
Expenses include those costs that arise in the course of the ordinary activities of the entity, for
example cost of sales, cost of services provided, wages, advertising or depreciation. These usually
take the form of an outflow or depletion of assets such as cash and cash equivalents, inventory,
property, plant and equipment.
Expenses also include losses that meet the definition of expenses and may, or may not, arise in the
course of the ordinary activity of the entity (for example, disasters like fire or flood) and losses from
the sale of non-current assets.
Unrealised losses are also included; for example those arising from the effects of increases in the
rate of exchange. For decision-making purposes, losses are displayed separately in the Statement of
Comprehensive Income. Losses are often reported net of related income.
Auditors fees are an expense for a company because they cause decreases in economic
benefits during the accounting period when cash is paid out (or when the bank overdraft is
increased in settlement), causing a decrease in profit which decreases equity. The auditors
fees were not paid to any shareholders.
Key points
Expenses are recognised in the Statement of Comprehensive Income when a decrease in future
economic benefits related to a decrease in an asset or an increase of a liability has arisen that can
be measured reliably.
Expenses are recognised when there is an increase in liabilities (for example, accrual of employee
entitlements) or a decrease in assets (when
equipment is depreciated).
In March 2014, High Tech Industries received
a large order for computers. The value of the
order was $2 million. Delivery is not until 10
April. The managing director wants some
of the revenue recognised in the financial
period ended 31 March 2014. The accountant
disagrees.
i
s
t
o
c
k
5A
47
AC3004
financial elements
Explain the correct treatment for the revenue earned from the sale of the computers in
accordance with the NZ Framework.
Check your answers.
1. Classify each of the following as assets, liabilities, equity, income or expenses:
a. accrued expenses
b. wages and salaries
c. inventory held on layby at balance day
d. possible future refunds that may be necessary on faulty goods being returned after
the Christmas sales. The financial period ends on 31 December.
e. net assets.
2. Give a reason for each answer in 1. above.
Check your answers.

For each of the following items, explain fully in terms of its definition whether an asset, liability,
income or expense exists and the reason it should be recognised if it does exist at balance day.
1. Plant and equipment
2. Inventory ordered but not yet received
3. An account owing for vehicle expenses
4. Well-trained staff
5. Bad debts written off
6. Credit sale.
Check your answers.

Comment fully whether each of the following situations involves an asset or not.
1. A district health board has a number of old computers that cannot run modern software.
2. A start-up technology company keeps secret the know-how gained from a development project.
3. A large department store intends to purchase a container-load of linen from a new supplier.
4. The Government gifts a 30-acre property to the regional council to encourage economic
growth and mineral discovery in the local area.
Check your answers.
5B
5C
5D
48 AC3004
teacher-marked activities 6
This is the time to revise the main topics in this booklet before you attempt the teacher-marked
activities. You can:
make notes, highlight key points, have another go at the practice activities
contact your teacher if you would like to discuss your work
check the success criteria for each lesson to make sure you can do these.
When you have revised the topics, you are ready to attempt the teacher-marked activities.
achievement criteria
Please refer to the Reference guide (AC3000R) for the achievement criteria for AS91406
Accounting 3.3.
The extract below is from the notes to the financial statements of Mighty River Power Limited
(MRP*). The extract describes Mighty River Powers economic activities.
Note 1. Accounting Policies (extract):
(1) Reporting entity (extract)
The Groups principal activities are to invest in, develop and produce electricity from
renewable and other energy sources and to sell energy and energy related services and
products to retail and wholesale customers.
This indicates that:
Mighty River Power is a reporting entity.
Mighty River Power generates electricity from hydro dams and geothermal plants
constructed by the company.
Mighty River Power sells the electricity it has generated to wholesale and retail customers.
Customers pay for electricity used based on meter readings.
*You may use the abbreviation MRP to refer to Mighty River Power Limited in your answers.
1. Explain why, as a reporting entity, Mighty River Power Limited is required to prepare general
purpose financial statements.
2. Explain the importance of the following statement included in Mighty River Power Limiteds
accounting policies:
The accounting policies set out below have been applied consistently to both periods
presented in these consolidated financial statements.
3. The Audit Report accompanying Mighty River Power Limiteds financial statements states that
the financial statements comply with generally accepted accounting practice in New Zealand
(NZ GAAP); and give a true and fair view.
6A
49
AC3004
teacher-marked activities
a. Explain, in terms of comparability with other entities, why the financial statements are
required to comply with NZ GAAP. In your answer, you should state what complying with
NZ GAAP means.
b. Explain how Mighty River Power Limited ensures its financial statements give a true and
fair view.
Mighty River Power Limiteds significant accounting policies include the following:
Revenue (extract)
Revenue recognised in the income statement includes the amounts received and
receivable for energy and related energy services supplied to customers in the ordinary
course of business.
Revenue includes the value of units assessed as being recorded on meters as at balance
date, but for which invoices have not yet been sent.
1. Use the definition of income to explain why units assessed as being recorded on meters as at
balance date are reported as income.
2. To be recognised as income, the income must have a value that can be measured reliably.
Explain how units assessed as being recorded on meters as at balance date can be
measured reliably.
3. Explain, in terms of accrual accounting, why revenue recognised in the income statement
includes amounts received and receivable for energy and related energy services.
4. Explain why receivables for energy are a current asset in the balance sheet. You are not
required to explain why receivables are an asset.
Mighty River Power Limited has constructed a number of new geothermal power generation
plants in recent years.
Mighty River Power Limiteds significant accounting policies include the following:
Owned assets
Generation assets, which include freehold land and buildings and generation plant and
equipment, are measured at fair value based on periodical valuations by third party
valuation experts
Explain how a geothermal generation plant constructed by Mighty River Power Limited and
measured at fair value meets the definition and recognition criteria of an asset.
6B
6C
50
AC3004
teacher-marked activities
Base your answer on Mighty River Power Limiteds policy for owned assets. In your answer, you
should:
link the characteristics of an asset to reporting of generation assets constructed by Mighty
River Power Limited
explain why the amount reported for generation assets can be relied on by a bank manager
asked to provide loan finance secured over the generation assets.
What to do now
Check that you have:
3/5
marked and corrected the self-marked practice activities
filled in the self-assessment rubric on the back page
filled in the cover sheet from the back of the booklet and attached your self-marked
activities and teacher-marked activities.
Send your teacher-marked and self-marked work to your teacher.
51 AC3004
answer guide 7
how to use the answer guide
You will check your own answers, except in teacher-marked activities.
The answers give you essential feedback. Use them well.
Always:
check your answers carefully after you finish each activity
try to work out where you have made errors
study any reasons given for the answer
write any corrections on your own work.
Contact your teacher if you are having any difficulties.
1. features of reporting entities
Two other pieces of financial information that could influence your decision whether or not to
purchase shares could be:
interim and final dividend per share this will show you the likely return on your investment if
you purchased shares.
cash and cash equivalents at the end of the year this will show you whether Air New
Zealand is keeping a positive cash flow, and therefore likely to remain solvent.
previous years figures this will show you whether Air New Zealand is growing, is their net
profit higher than last year.
The above are just a few examples of other pieces of financial information that would be found in
the 2011 annual financial report for Air New Zealand; you might have other examples.
1. The objective of general purpose financial reporting is to provide financial information about
the reporting entity that is useful to existing and potential investors, lenders and other
creditors in making decisions about providing resources to the entity.
2. Examples of stakeholder of general purpose financial reports are employees, creditors,
shareholders, local communities, society.
3. A shareholder may be interested in general purpose financial reports so that they can decide
whether to hold or sell their existing shares in the reporting entity.
A creditor may be interested in general purpose financial reports to assess the security for
amounts they lend to the entity.
An employee may be interested in general purpose financial reports to asset the ability of the
entity to pay other benefits to them.
1A
1B
52
AC3004
answer guide
4. Non-financial and supplementary information included in an entitys annual report provide
users with additional information about the entity that is not always easily seen in general
purpose financial reports. An example of this type of information is management reviews
and/or comments that describe and explain the main features of the entitys financial
performance and position, the principal uncertainties (risks) the entity faces, the entitys
resources not recognised in the Statement of Financial Position.
5. Complying with New Zealand general accepted accounting practices (NZ GAAP) means that
general purpose financial reports are prepared based on New Zealand international Financial
Reporting Standards (NZIFRS), which outline rules and procedures for reporting the effects of
transactions and other events in the financial reports.
6. The purpose of NZIFRS in the preparation of general purpose financial reports is to ensure
that a true and fair view is presented of the entity.
2. new zealands financial reporting framework
1. A significantly adverse impact on society means that when a reporting entity fails there is
a large negative impact on all members of society, the stakeholders of the entity are not the
only members of society that are affected.
2. The new policy for a wide-range of stakeholders would provide additional assurance that the
general purpose financial reports reflect a true and fair view of the reporting entity.
3. The new policy for reporting entities would mean that extra costs may be incurred as the
reporting entity complies with the new policies set out.
1. The benefits gained from information should be greater than the costs of providing it. The
XRB would want to ensure that the benefits gained from the information provided by entities
would outweigh the costs of providing the information.
2. The New Zealand Accounting Standards Board would want to encourage confidence in
New Zealand financial reporting because New Zealand entities rely on overseas investors.
If overseas investors have confidence in the way that New Zealand entities report then this
would encourage overseas investors to continue to invest.
3. The consequence for New Zealand if this confidence was lost would mean less foreign
investment. This would it make in difficult for New Zealand entities to start-up and grow given
that New Zealand is small compared to the rest of the world.
4. The auditing of financial reports enhances accountability to stakeholders as it ensures that
the entities financial reports have been checked by an independent accountant. An entity
would want to ensure that their financial reports agreed with the auditor.
5. One of the main roles of the New Zealand Institute of Chartered Accountants is to ensure that
quality standards of accounting are practised so that all reporting entities prepare financial
statements that comply with the Financial Reporting Act 1993.
2A
2B
53
AC3004
answer guide
1. a. Supertyres Limited would have no general purpose financial reporting requirements, as
the entity has less than 10 shareholders. Supertyres Limited would likely prepare special
purpose financial reports for Inland Revenue and banks.
b. Footwear Distributors Limited would have general purpose financial reporting
requirements in accordance with tier 2. The entity is a large for-profit company and
therefore must prepare general purpose financial reports, apply NZIFRS but with RDR,
have the reports audited and made publicly available.
2. Small for-profit companies are only required to prepare special purpose financial reports.
This saves them money as they do not have to pay for the preparation of a full set of general
purpose financial reports and the auditing of these reports.
3. general purpose financial reports
1. The Financial Reporting Act 1993 requires New Zealand reporting entities to produce general
purpose financial reports prepared in accordance with generally accepted accounting practices.
2. The purpose of the New Zealand Framework is to set out the concepts that underlie the
preparation and presentation of financial and non-financial statements for external users.
3. Financial statements are prepared and presented for external users by many entities around
the world. Although such financial statements may appear similar from country to country,
there are differences. A complete, comprehensive and single document would be considered
better as this would help narrow the differences by harmonising regulations, accounting
standards and procedures relating to the preparation and presentation of financial statements.
4. The Conceptual Framework is not a standard and does not define standards for any particular
measurement or disclosure issue. Financial reporting standards take precedence over the
content of the Conceptual Framework. Where there is no financial reporting standard,
preparers of financial statements can refer to the rules and guidelines provided by the
Conceptual Framework.
5. NZ Equivalents to International Reporting standards provides rules and guidelines that
establish requirements for the recognition, measurement, presentation and disclosure of
transactions (and other events) in general purpose financial statements.
1. Financial statements are expected to show a true and fair view when they comply with NZ
GAAP. This means they follow all relevant NZFIRS and include any additional disclosures
necessary to ensure a true and fair view is presented.
2. Air New Zealand ensures it financial statements give a true and fair view as they have made
a statement saying they have complied with generally accepted accounting practice in New
Zealand and have had their financial statements audited to verify this.
2C
3A
3B
54
AC3004
answer guide
1. The financial statements that make up general purpose financial reports are: Statement of
Comprehensive Income, Statement of Financial Position, Statement of Cash Flows.
2. Any two of:
to provide information about the financial position, performance and changes in financial
position of an entity that is useful to a wide range of users in making economic decisions
to show the results of the stewardship (or accountability) of management for the resources
entrusted to it
to assess the reporting entitys compliance with legislation, regulations, common law and
contractual arrangements
to make decisions about providing resources to the reporting entity
to identify the objectives and targets (financial and non-financial) normally established by
formal process
to measure actual achievements against those objectives and targets
to assess the reporting entitys service performance and reflect the nature and dimensions
of performance relevant to the entity.
3. Management has an obligation to identify any circumstances which may force the business to
cease trading. When preparing financial statements, management has to assess whether the
entity has the intention or need to liquidate.
A mortgage classified as a long-term liability indicates managements intention to continue
operating (otherwise it would be shown as a current liability). Property, plant and equipment
classified as a non-current asset indicates that the business has long term plans to continue
operating (otherwise this would be shown as a current asset and valued at likely disposal value).
4. Prepaid advertising
Prepaid advertising will be deducted from the advertising reported in the Statement of
Comprehensive Income because the advertising has not occurred in this period.
The prepayment will be reported as a current asset in the Statement of Financial Position
on balance day (this period) as it represents a future economic benefit because the advertising
will generate sales, and thus a cash inflow, next period.
Wages owing
The amount of wages owing is added to the wages expense reported in the Statement of
Comprehensive Income because the expense has occurred in this period.
Accrued expenses will be reported as a current liability in the Statement of Financial
Position on balance day (this period) as the amount owing represents a present obligation
to give up money in the future to pay the wages.
1. Both land and buildings will be shown in the Statement of Financial Position of High Tech
Industries at the current valuation of $350,000 (land) and $260,000 (buildings).
2. A higher and more realistic value for assets owned by High Tech Industries will encourage
lenders to lend money for expansion since the assets of the business will provide better
security for a loan.
Note: Wherever context is given you must refer to this in your answer.
3C
3D
55
AC3004
answer guide
4. qualitative characteristics
1. Information has the quality of relevance when it influences the economic decisions of users
by helping them evaluate past, present or future events or confirming/correcting, their past
evaluations. The directors feel that the survey acknowledgment is relevant as it may influence
the economic decisions of users (by helping them to evaluate future events for Ring-a-ding
Ltd). For example, by including an amount for goodwill, the company may give an indication
to the users about the ability of Ring-a-ding Ltd to generate future sales because customers
voted them to be the best performing mobile phone company in New Zealand.
2. The amount of goodwill cannot be measured with reliability as no underlying transaction has
taken place to represent the amount. If the directors included an amount of goodwill based
on the survey then this amount may not be complete, neutral and free from error as it would
be amount that would be based on an estimate.
1. Comparability.
2. The bank manager would like to see whether there has been growth in profitability over the
years as this will help to determine whether Ring-a-ding Ltd has the ability to repay the loan.
1. a. Comparability previous years figures enable comparisons to be made between
different accounting periods. Relevance is also correct as the user is provided with
feedback information.
b. Understandability since the notes assist with the users understanding of the financial
statements. Reliability is also correct since more information is given about actual events.
2. The precise information gathered over the two years would be more faithfully represented
but some of the information after that amount of time may not be enhanced with timeliness.
The older the information is the less useful it is.
3. It is not relevant to report the $200 chairs as an asset as the amount of $200 is not of a
material amount. Reporting the $200 as an expense will not influence decisions that users
make on the basis of this financial information.
5. financial elements
The accountant is correct. Income can only be recognised when an increase in future economic
benefits related to an increase in an asset which results in an increase in equity that can be
measured reliably has taken place during the accounting period.
During the financial period ended 31 March 2014, High Tech Industries received neither increased
cash nor increased accounts receivable from this $2 million order for computers.
4A
4B
4C
5A
56
AC3004
answer guide
1. and 2.
a. Accrued expenses liability. Accrued expenses are present obligations of the entity from past
financial events (such as using power or communication services). In the future, the entity will
have to outlay cash, a resource embodying economic benefit, to settle such obligations.
b. Wages and salaries expense. Wages and salaries represent a decrease in economic
benefits during the accounting period in the form of an outflow of cash that decreases
equity by decreasing profit. The wages and salaries have been paid to employees and not
distributed to shareholders.
c. Inventory held on layby at balance day asset. The value of the inventory held on
layby at balance day is an asset since it is in the control of the entity as a result of past
transactions (purchased from suppliers) and the entity expects to gain sales revenue
from it in the future.
However, the entity currently has an obligation to the buyers for the amount of the
deposits already made and this amount is a liability, since it requires an outflow of cash,
a resource embodying future economic benefits in the future, to settle the obligation.
d. Not a financial element. Possible future refunds on faulty goods would not be recognised as
a liability in the Statement of Financial Position since it is not probable that cash (a resource
embodying future economic benefits) will be used to settle the claims made on faulty goods
and the amount cannot be measured with any degree of certainty or reliability.
e. Net assets equity. This is the residual interest in the assets of the entity after deduction
of the liabilities.
1. Plant and equipment is an asset because it is a resource in the control of the entity (and no
other entity can use it) as a result of a past event which has been completed (when it was
purchased). The business expects future economic benefits to flow from the use of this plant
and equipment to generate revenue and receive cash.
Plant and equipment should be recognised as an asset in the Statement of Financial Position
since it is probable that the future economic benefits from the use of the plant and equipment
will flow to the entity and the cost of the plant and equipment can be measured reliably.
2. The inventory is not an asset since, although the entity expects economic benefits to flow
from this inventory in the future, its purchase has not been completed and therefore it is not
yet in control of the entity as a result of a past financial event.
Since the inventory does not satisfy all the characteristics of an asset, recognition at reporting
date is not an issue.
3. Vehicle expenses owing is a liability since the entity has a present obligation arising from
when the vehicle was serviced or the petrol purchased. Settlement of this obligation will
result in the future outflow of cash, a resource embodying economic benefits.
Vehicle expenses owing should be recognised as a liability at reporting date since it is
probable that there will be an outflow of cash representing future economic benefit to the
entity and the amount of cash required to settle can be measured reliably.
5B
5C
57
AC3004
answer guide
4. Well-trained staff is not an asset. Because there has been no past financial event, the entity
does not have control over their staff who could resign at any time. There is therefore no
guarantee of future economic benefits flowing into the entity from these well-trained staff.
Well-trained staff should not be recognised as an asset at reporting date since it does not
meet the criteria of an asset.
5. Bad debts written off is an expense as there has been a decrease in economic benefits during
the accounting period because the bad debts deplete the value of accounts receivable and
so result in decreases in profit and therefore equity not brought about by distributions to the
owners of the entity.
Bad debts written off should be recognised as an expense at reporting date since the amount
of the decrease in accounts receivable has arisen and can be measured reliably.
6. A credit sale is income because it results in an increase in economic benefit during the
accounting period in the form of increased (enhanced) accounts receivable and increased
equity from increased profit which has not arisen from contributions from equity participants.
A credit sale should be recognised as income at reporting date because the increase in economic
benefits related to increased amounts of accounts receivable can be measured reliably.
1. Although the old computers are a resource that has been in the control of the entity since they
were purchased some years previously, they do not satisfy the requirement that assets represent
future economic benefits for the entity since they cannot be used to run modern software.
2. Know-how from a development project in the past meets the definition of an asset since by
keeping the know-how secret the entity has control over it. Future economic benefits are
expected to flow in the form of revenue generated from this project.
3. The intention to purchase inventory does not of itself meet the definition of an asset, since
although the entity expects economic benefits to flow in the future from this container-load
of linen its purchase has not been completed and therefore it is not yet in control of the entity.
There is no past event.
4. An asset can be distributed to an entity. The 30-acre property gifted to the regional council
satisfies the characteristics of an asset. It represents a resource controlled by the regional
council as a result of a past event from which future economic benefits are expected to flow
to the regional council.
5D
58 AC3004
acknowledgements
Every effort has been made to acknowledge and contact copyright holders. Te Aho o Te Kura Pounamu apologises for any
omissions and welcomes more accurate information.
Extract: The NZ Framework: Conceptual Framework for Financial Reporting, 2010, External Reporting Board (XRB), Crown
copyright, 2011. Used in any medium for education and its promotion by permission.
Exam: 3.1 draft for school planning purposes, external exam retrieved from www.ncea.tki.org.nz/Resources-for-aligned-standards/
Social-sciences/Accounting/Level-3-Accounting New Zealand Qualifications Authority, 2012.
Annual Reports
RNZFB Annual Report 20112012. Used by permission
NZ Mountain Safety Council Annual Report 20112012. Used by permission
Richmond Annual Report 20112012. Used by permission
NZ Thoroughbred Breeders Association Annual Report 20112012, Photo: Trish Dunell. Used by permission
Photos
istockphoto
Confused man, 15450713
Red report, 3597140
Air New Zealand Boeing 777-200er, 17608911. Editorial use only
Working with digital tablet, 18325908
Torn white paper, 19396955
Old paper isolated, 9129767
Audit checklist on a desk, 18280199
Businesswomen and businessman team, 19888952
Question mark, 17850236
Holding a speech, 6454376
Auckland city sky tower, 14348438
Westpac, 17470246. Editorial use only
Big burger, 8429458
Mechanic repairs a tyre in the garage, 16813255
Costs, 16135432
The word liabilities highlighted in yellow on financial document, 19592716
Book blue isolated, 14446988
Office, 8108673
Closing the deal, 15826815
Two engineers at a building site, 12988570
Smart phone isolated on white, 17427005
59
AC3004
acknowledgements
Medical dental office waiting room, 17962700
Free delivery, 14775885
Checkout message, 20699584
Bank of super computers, 340147
bigstockphoto
Businessman reading newspaper, 211071
Air New Zealand aircraft at Christchurch airport, 30111578. Editorial use only
mychillybin
NZ piggy bank, 101148_42
60
AC3004
self-assessment ac3004
Fill in the rubric by ticking the boxes you think apply for your work. This is an opportunity for you
to reflect on your achievement in this topic and think about what you need to do next. It will also
help your teacher. Write a comment if you want to give your teacher more feedback about your
work or to ask any questions.
Fill in your name and ID number.

Student name:

Student ID:

Not yet
attempted
Didnt
understand
Understood
some
Understood
most
Very confident
in my
understanding
Describe the features of
reporting entities and apply
the statutory reporting
requirements.
Describe New Zealand
Generally Accepted Accounting
Practice (NZ GAAP).
Describe general purpose
financial reports.
Describe and apply the New
Zealand Framework for general
purpose financial statements.

Please place your comments in the box below.
Student comment
Contact your teacher if you want to talk about any of this work.
Freephone 0800 65 99 88
teacher use only
Teacher comment
Please find attached letter
authentication statement
I certify that the assessment work is the original work of the student named above.
for school use only
assessment
www.tekura.school.nz
cover sheet ac3004
students place student address label below or write in your details.
Full Name
ID No.
Address
(If changed)
Signed
(Student)
Signed
(Supervisor)

Accounting: Te Mātauranga Mahi Kaute

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Accounting: Te Mātauranga Mahi Kaute

Uploaded by

Copyright:

Available Formats

te mtauranga mahi kaute

You might also like