ASIC Entrepreneurship Accounting Theory Discussion 

Question Description

ASIC warns directors and auditors Just two weeks out from the end of the calendar year, the corporate watchdog also reminded companies that they must provide “useful and meaningful” disclosures about the impact of COVID-19 on their business, as well as any potential uncertainties that may lie ahead.

“Useful and meaningful disclosures about the business impacts and potential uncertainties will continue to be vital,” ASIC said on Tuesday. “Uncertainties may lead to a wider range of valid judgments on asset values and other estimates.”

 Disclosures in financial reports about uncertainties, key assumptions and sensitivity analysis will be important to investors, the regulator warned. Assumptions underlying estimates and assessments for financial reporting purposes should be “reasonable and supportable”, ASIC said.

“Assumptions should be realistic, and not overly optimistic or pessimistic.” ASIC’s move to highlight the key areas of focus in financial reports comes as the Reserve Bank warned that the banking system faces a new solvency test in the pandemic crisis. “We’ve had the largest contraction in global output since the Great Depression,” RBA head of stability Jonathan Kearns said in a speech on Tuesday. “And as that impairs some households’ and businesses’ ability to repay their loans, the liquidity phase of the crisis is giving way to a solvency phase.” Hours later, ASIC Commissioner Cathie Armour said investors would expect “clear disclosure” about the impact the pandemic had on business. “In the current environment, the quality of financial reports and related disclosures is more important than ever for keeping investors informed,” she said. “Entities with businesses adversely affected by the COVID-19 pandemic should continue to focus on the reporting of asset values and financial position.

“Investors will expect clear disclosure about the impacts on an entity’s businesses, any risks and uncertainties, key assumptions, management strategies and future prospects.” Asset values, assumptions and disclosures may be “significantly affected by developments or ongoing conditions” since the last reporting period for the June half, she added.

For the December half reports, ASIC said it would pay particular attention to asset values, provisions, solvency and going concern assessments, events occurring after year end and before completing the financial report, and disclosures in the financial report and operating and financial review. Swinburne University of Technology Page 5 of 6 ACC30008 School of Business, Law and Entrepreneurship Accounting Theory The operating and financial review should complement the financial report and tell the story of how the entity’s businesses are impacted by the COVID-19 pandemic, ASIC said.

 “The underlying drivers of the results and financial position should be explained, as well as risks, management strategies and future prospects,” the regulator said. Extracted from Cliona, O. ASIC warns directors and auditors. The Australian. Dec 15, 2020. Required I. What measurement method do you think would be suitable to report asset values and financial position in the context of the Covid-19 Pandemic?

Explain your answer drawing on the merits and demerits of your chosen method. (Maximum words 250) (5 Marks) II. Explain the term “useful and meaningful” disclosures used in this article. You may use the Conceptual Framework for Financial Reporting and ASIC Guidance discussed in the article in answering this question.

(Maximum words 250). (5 Marks) III. Complexities in the business environment such as the Covid-19 Pandemic may bring creativity in accounting and accountants could exploit loopholes. Can you suggest two ways to control ‘creativity’ by accountants? (Maximum words 200). (4 Marks) IV. What theories from ACC30008 can be applied to the situation reported in this article? ().

Skill Required: