Chapter 1

Nature and regulation of

companies

©2021 John Wiley & Sons Australia Ltd

 Learning objectives

1.1 Summarise the nature and attributes of a company

1.2 Discuss the different types of companies that may be formed under
the Corporations Act 2001
1.3 Describe the necessary documentation for forming a company
1.4 Describe the types of records needed to manage a company
1.5 Compare and contrast shares and debentures, and discuss the
reasons for issuing disclosure documents
1.6 Discuss the background and purpose of the Corporations Act 2001
by which companies are formed, administered and dissolved
 Learning objectives

1.7 Evaluate the reasons for the development of accounting standards

and describe the current arrangements for establishing
accounting standards in Australia, subject to global influences in the
standard-setting process
1.8 Discuss the roles played by the Australian Securities and
Investments Commission (ASIC) and the Australian Securities
Exchange Limited (ASX)
1.9 Analyse the concepts of general purpose financial reporting and the
reporting entity
1.10 Describe the differential reporting requirements
 The nature of a company

• A company is a legal entity

• Incorporated via registration by Australian Securities and
Investments Commission (ASIC)
• Subject to requirements of Corporations Act 2001
2.7 million companies in Australia (ASIC 2019)
• A company has:
• the advantage of limited liability
• refers to the fact that the shareholders of the company are liable only to
the extent of any amounts unpaid on their shares in the event of the
winding up of the company. Contrast this to a partnership, where the
partners are jointly and severally liable for all partnership debts
 The nature of a company

• separate legal existence from its members

• a company has continuity advantages over partnerships; a company is
unaffected by the death or bankruptcy of a member; members can sell
their shares at any time
• the legal powers of a natural person
• financing advantages
• the right to own assets and enter contracts
• the right to sue and be sued
 Different types of companies

Proprietary companies
• Most common type of company is a “Proprietary company”
• Limited by Shares (Pty Ltd)
• Unlimited with a share capital (Pty)

• Proprietary companies
• Must have a share capital (limited by shares or unlimited)
• Minimum of 1 shareholder, maximum of 50
• Minimum of 1 director
• Cannot raise funds from the public
• Classified as large or small (see next slide for further discussion)
 Different types of companies

• Proprietary companies – classify as ‘large’ or ‘small’ for

reporting purposes
• Large proprietary companies must satisfy at least two of the
following criteria:
• Consolidated revenue: > $50 million
• Consolidated gross assets: > $25 million
• Number of employees: > 100
• Entities that do not satisfy the criteria for classification as a
large proprietary company are classified a small
 Different types of companies

• Large proprietary companies must prepare formal financial

statements
• in accordance with accounting standards
• that give a true and fair view
• have them audited and
• provide a copy to shareholders and ASIC
• Small proprietary companies
• are not required to prepare formal financial statements or have them
audited
• must maintain sufficient records to allow financial statements to be
prepared and audited if required
• if financial reports are prepared they do not have to comply with
accounting standard requirements
 Different types of companies

Public companies
• A public company is one that is not a proprietary company
• Limited by Shares
• Unlimited with a share capital
• Limited by guarantee A public company can be limited by shares or unlimited with a share
capital (just like a proprietary company) but is not required to have share
• No Liability capital and may be limited by ‘guarantee’. This means that members
agree/guarantee to contribute a certain amount in the event of liquidation.
• A public company: However, most public companies are limited with a share capital .

• Can invite public to subscribe for securities

• Can list on Australian Securities Exchange (ASX)
• Minimum 1 member, no maximum
• Minimum of 3 directors
• Must prepare / publish audited financial statements
Financial statements must be prepared in accordance
with Accounting standards and regulations
 Different types of companies

Other titles for companies

• Listed corporations
• Public companies listed on the ASX
• Disclosing entities
• An entity with enhanced disclosure (ED) securities is an entity
which:
• has its shares listed on the ASX (so a public company listed on the ASX is a disclosing
entity)
• is issuing securities (other than debentures) via a disclosure document (e.g.,
prospectus), under a compromise or scheme of arrangement
• is offering its securities as part of a takeover scheme
• is a borrower who has issued debentures
• must prepare audited, half-yearly and annual financial reports in accordance with
accounting standards and are subject to continuous disclosure requirements
 Different types of companies

• Foreign companies
• Incorporated outside of Australia or
• in an external territory of Australia
• No-liability companies
• Must have NL at the end of their name (e.g., XYZ NL)
• Sole object of the company must be mining
• Shareholders are not liable for calls on shares or debts of the
company
• The company can forfeit shares for non-payment of calls
 Forming a company

• To register a company, a person lodges the prescribed

application form with ASIC
• On acceptance of the application ASIC will:
• Allocate an ACN (Australian Company Number)
• Register the company
• Issue a certificate of registration
• A company legally comes into existence on the date
recorded on this certificate
 Forming a company

• Management of the company is governed either by replaceable rules

or constitution
• Replaceable rules
• “Pro-forma” rules contained within Corporations Act
• Rules deal with
• Issues relating to directors (appointment, powers, remuneration and termination)
• Directors’ meetings
• Members’ meetings
• Inspection of company books and records
• Shares and share transfers
• Constitution
• Necessary if a company wants rules different to the pro-forma rules in the
replaceable rules
• Public company must lodge constitution with ASIC
 Administering a company

• Directors manage on behalf of the members

• Certain registers and records must be maintained
• Minute books – records actions/decisions in meetings
• Financial records – to enable statements to be audited
• Registers of members (Share register)
• Register of option holders
• Register of debenture holders

• Required to be kept at the company’s registered office

 Funding a company

• A public company can raise funds by issuing securities:

• Shares (equity)
• Debentures (debt)
• Options (equity)
• Shares represent ‘ownership’ and can be issued to the
public or privately ‘placed’ with new investors or current
shareholders
• Shares can be of different types:
• ordinary shares
• preferences shares (special rights for such shares must be specified in constitution
or via a special resolution
• Public float (i.e., issue of shares to the public) is the most popular method to
raise equity in Australia
 Funding a company

• Debentures represent a claim on the assets of the company

and may be secured by a fixed or floating charge of the
company’s assets
• Debentures descriptions include
• A mortgage debenture
• A debenture
• An unsecured note or
• Unsecured deposit note
• A debenture trust deed must be executed and a trustee appointed
for debenture holders
 Funding a company

• Options and interests in managed investment schemes:

– An option gives the holder the right but not the
obligation
- To buy or sell a specified number of company securities (shares
or debentures)
- At a stipulated price
- At a specified date
 Funding a company

• Disclosure documents
• Most public issues of shares, debentures or options require a
disclosure document to be issued:
• Written notice inviting subscription
• Content regulated by Corporations Act
• Contains issue price, terms and conditions
• Copy of the disclosure document must be lodged with ASIC
• A prospectus is an example of a disclosure document
• Most public issues require a disclosure document, exceptions
include, for example:
• Small-scale personal offers
• Offers to sophisticated investors, professional investors, etc.
 Background to the Corporations Act (2001)

• The Corporations Act (2001) arose from Corporate Law

Economic Reform Program (CLERP)
• Federal Government program, commenced in 1997
• Nine discussion papers: CLERP 1 – CLERP 9
• Resulted in wide ranging reforms including:
• Ease of access to capital / enhanced shareholder rights
• Greater commercial / international focus for accounting standards
• Establishment of the Financial Reporting Council (FRC) / reformed auditing
practices
• Regulation of financial services and continuous disclosures
• Most recently, changes to dividend rules and remuneration disclosures,
requirement to hold meeting if requested by at least 5% of shareholders,
penalties for non-payment of employee entitlements
 Accounting regulation of companies

• Brief history of accounting regulation in Australia

• Pre-1984 – government not involved in development or enforcement of
accounting standards (developed by accounting bodies and Australian
Accounting Research Foundation (AARF)); problems with non-compliance
• 1984 – governmnet established the Accounting Standards Review Board (ASRB)
– standards developed by AARF, reviewed and approved by ASRB, enforced by
law (but with a ‘true and fair’ override)
• 1988 – ASRB now responsible for development of standards
• 1991 – ASRB replaced by larger more powerful AASB – ‘true and fair’ override
removed to improve compliance
• 1990s – AASB / AARF develop ‘Conceptual Framework’ – SAC 1 to 4 – major
achievement but also source of criticism
• 1999 – AASB disbanded under CLERP and replace by a new AASB, supervised by
the FRC
• Since 2000 – new AASB supervised by the FRC
 Accounting regulation of companies

• Financial Reporting Council (FRC)

• Role of the FRC includes:
• Oversee / give advice – standard setting processes – AASB & Auditing and
Assurance Standards Board (AUASB)
• Determine broad strategic directions, monitor priorities and appoint members
of AASB and AUASB
• Monitor development of international accounting standards
• Assess continued relevance and effectiveness of accounting and auditing
standards
• The FRC cannot direct the AASB or AUASB in relation to a
particular standard and cannot veto a standard recommend
by the boards
 Accounting regulation of companies

• The Australian Accounting Standards Board (AASB)

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

• The ASIC Act 2001 specifies three objectives of developing

accounting standards :
1. Financial information objective
• Users and Directors
• Qualitative characteristics
• Development of auditing standards that provide auditors with guidance in
forming an opinion whether financial reports comply with the Corporations Act
• Auditors’ report that reliable and understandable
2. Facilitate the Australian economy objective
• Reduce cost of capital
• Enhance the international competiveness of Australian entities
• Standard will be clearly stated and easily understood
3. Maintain investor confidence objective
• In the economy and in capital markets
 Accounting regulation of companies

• 2002 – FRC announced AASB would adopt standards issued by

the International Accounting Standards Board IASB standards
for all financial statements for years starting 1 January 2005
• Initially AASB harmonisation process:
• restricted some options allowed by international standards but such
disparities have now been eliminated
• required more detailed disclosures, but these have now been
removed
• Differences are made obvious in AASB standards
• Additional paragraphs for public and not-for-profit sector entities
(clearly labelled by ‘Aus’ prefix)
• Additional paragraphs related to Reduced Disclosure Requirements
 Accounting regulation of companies

• AASB now deals directly with interpretations issued by IFRS

Interpretations Committee (IFRIC)
• Advisory Panels are formed as required (UIG now defunct) when:
• further guidance might be required for an interpretation
• an Australian interpretation is required to deal with an issue that relates to matters unique to the Australian
legal environment
• Interpretations numbered 1 – 1000 originate from IFRIC or its predecessors
• AASB 1001+ are unique to Australia and have no international equivalent

• In summary, AASB
1. Adopts IASB standards and interpretations
2. Public and not-for-profit sectors
• Inserts Aus paragraphs
• Provides local standards & interpretations
3. Is a member of Accounting Standards Advisory Forum (ASAF) of the IASB
• Provides technical advise and expertise to IASB
 Accounting regulation of companies

Current standard-setting arrangements

• As a result of adopting international standards there are three
sources of AASB standards
• AASB 1-99
• equivalent to International Financial Reporting Standards (IFRS) issued by the
IASB
• have same number as equivalent IASB standard
• IFRS 3 = AASB 3 Business Combinations
• AASB 101-199
• equivalent to IAS standards issued by the International Accounting Standards
Committee (IASC), predecessor to the IASB
• have same number (+100) as the IAS standards on which they are based
• IAS 16 = AASB 116 Property, Plant & Equipment
 Accounting regulation of companies

• AASB 1001-1099
• Australian standards with no international equivalents, and include:
• AASB 1048 Interpretation of Standards
• AASB 1049 Whole of Government and General Government Sector Financial
Reporting
• AASB 1054 Australian Additional Disclosures
• AASB 1057 Application of Australian Accounting Standards

• Current institutional arrangements for the development of accounting

standards are summarised in the next slide
Accounting regulation of companies
 Accounting regulation of companies

The International Accounting Standards Board (IASB)

• 1973 IASC (International Accounting Standards Committee)
• Membership – professional accounting bodies
• 2001 IASB formed to replace IASC
• Membership – representatives of accounting standards boards
• Independent, privately funded accounting standard setter
• Overseen by the IFRS Foundation
 Accounting regulation of companies

• 2016 Constitution of IFRS Foundation and IASB revised with

the following objective:
• Development of a single set of high quality, understandable,
enforceable and
• Promote the use and rigorous application of those standards
• Take into account the needs of a range of sizes and types of entities
• Promote the adoption of IFRSs through the convergence of national
account standards and IFRSs
 Accounting regulation of companies
FASB – the accounting

Financial Accounting Standards Board (FASB) standard setting board for

USA

• 2005 – MOU – convergence of US GAAP and IFRS

• Joint projects have been undertaken ever since
• 2008 – Group 20 (G20) urged FASB and IASB to complete
convergence
• Roadmap developed by SEC , with SEC to decide in 2011 for application
from 2014
• 2010 – FASB and IASB recommit to 2011 timeline
• 2011 – no decision by SEC
• 2012 – a further work plan developed
• Considerable opposition in US – outcome is still uncertain
 Accounting regulation of companies

The IFRS Interpretations Committee

• Sub-committee of the IASB
• Task is to deal with issues of widespread importance on a
timely basis and to reach a consensus on
• Reporting issues not covered in IFRS standards
• Issues of unsatisfactory or conflicting interpretations
• IFRS Interpretations
• Are adopted by the AASB
• With additional AUS paragraphs added for public and not-for-profit
sectors
 Accounting regulation of companies

The Asian-Oceanian Standard-Setters Group

• Established 2009, initiated by China, Japan and Korea
• Now has 27 member countries, including Australia, China, Japan, Korea
New Zealand, Indonesia, Malaysia, Singapore, India
• Lobby group to IASB representing views of the Asian-Oceanic region

The European Financial Reporting Advisory Group

• Established in 2001to assist the European Commission regarding
endorsement and implementation of IFRS standards and interpretations
• Participates in IASB due process
• European listed companies have applied international standards in
consolidated accounts since 2005
 Other important regulatory organisations

The Australian Securities and Investments Commission

(ASIC)
• Independent government body that administers and enforces
• Corporations Act (investigate and prosecute breaches)
• Financial services laws to protect consumers, investors and creditors
• ASIC Act 2001 requirements of ASIC include
• Maintain/ improve financial system
• Promote confident / informed participation by investors and consumers
• Administer laws with minimal ‘red tape’
• Monitor / promote market integrity and consumer protection
• Since 2010 ASIC is responsible for supervision of securities markets
• Supervise real-time trading and prosecute misconduct
Other important regulatory organisations

• List of powers of ASIC

 Other important regulatory organisations

The Australian Securities Exchange (ASX)

• A public company that operates Australia’s share markets
• Prior to 2010 it had a supervisory role – since taken over
by ASIC
• Improves information disclosure via its Listing Rules
• Played a major role in influencing the move towards the
AASBs adoption of IASB standards
 General purpose financial reports and the
reporting entity concept
• More than 32,000 Australian companies required to produce
financial reports
• However, not all companies are required to prepare financial
reports that comply with accounting standards
• Concern over complexity and disclosure requirements of
accounting standards
• AASB 1057 specifies when certain accounting standards are
applied to entities
 General purpose financial reports and the
reporting entity concept
• Australian Accounting Standards apply to:
• each reporting entity that is required to prepare financial reports
in accordance with Part 2M.3 of the Corporations Act
• general purpose financial statements of each other reporting
entity
• financial statements that are, or are held out to be, general
purpose financial statements
 General purpose financial reports and the
reporting entity concept
General purpose financial statements
• Two types of financial statements:
• General purpose financial statements (GPFSs)
• Special purpose financial statements (SPFSs)
• Conceptual Framework defines 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
relating to providing resources to the entity
• Intention that all GPFSs prepared comply with accounting standards
and directed to information needs of users who lack power to obtain
such information for themselves
 General purpose financial reports and the
reporting entity concept
• SPFSs – no requirements to comply with accounting
standards as needs of special users determined by the
company
• Users normally have the power to ask for information they need
• SPFSs no longer available to for-profit companies when
preparing an annual financial report required by the
Corporations Act for annual reporting periods beginning on
or after 1 July 2021 (AASB 2020-2).
 General purpose financial reports and the
reporting entity concept
The reporting entity and users of financial statements
• The Conceptual Framework for Financial Reporting (issued May
2019) defines a reporting entity as:
• an entity that is required, or chooses, to prepare financial
statements. A reporting entity can be a single entity or a portion of
an entity or can comprise more than one entity. A reporting entity
is not necessarily a legal entity.
• Who are the users that depend on GPFSs for decision making
purposes?
• According to the Conceptual Framework users are:
• existing and potential investors, lenders and other creditors (i.e.,
capital providers)
 General purpose financial reports and the
reporting entity concept
• Other users are regulators and members of the public
• However, GPFSs are not primarily directed to these other groups
• The restricted group of users contrasts with user groups
identified in the Conceptual Framework prior to 2013
revisions and in the previous SAC 2 (which identified many
users)
 Differential reporting

• IASB approach – all General Purpose Financial Statements

will
• Apply all international accounting standards
• Provide required disclosures and any other requirements
• This is very costly approach for Small and Medium-sized
Entities (SMEs)
• IASB produced a new standard, IFRS for SMEs
• Extensively reduced disclosure requirements
• Reduced accounting choices (e.g., all borrowing expenses expensed)
• Simplified accounting principles of recognition and measurement for
some items
 Differential reporting

• Under the IFRS for SMEs standard

• A ‘public accountability’ test applies
• A SME is defined as an entity that:
• do not have public accountability
• publish general purpose financial statements for external users
• An entity has ‘public accountability’ if:
• Its debt or equity instruments are traded in a public market,
• It is in the process of issuing such instruments for such trading, or
• It holds assets in a fiduciary capacity for a broad group of outsiders as
one of its primary businesses (e.g., banks, credit unions, insurance
companies)
 Differential reporting

• In Australia reporting entities under Chapter 2M are

required
• to comply with all accounting standard requirements
• Differential reporting
• Until recently differential reporting in Australia based on the
reporting entity concept
• Reporting entities prepare GPFSs
• Non-reporting entities not required to provide GPFSs
• Differential reporting introduced in a two-stage process
• Stage 1: Introduce the Reduced Disclosure Regime
 Differential reporting

• AASB 1053 Application of Tiers of Australian Accounting

Standards applies for years commencing 1 July 2013
• Introduces two tiers of reporting:
• Tier 1 – comply fully with disclosure requirements of IFRSs
adopted in Australia
• Tier 2 – can adopt a Reduced Disclosure Regime (RDR)
• Tier 2 entities have substantially reduced disclosures
• However, they have the same recognition, measurement and presentation
requirements
• Each Australian standard sets out disclosure requirements from which Tier
2 entities are exempted
• AASB have also included Public and Not-for-Profit sectors
(including government entities) in the RDR
Differential reporting
 Differential reporting

• Concern that requirements under Tier 2 may still be too

onerous or costly
• As a result, AASB issued ED 295 General Purpose Financial
Statements – Simplified Disclosures for For-Profit and Not-
for-Profit Tier 2 Entities in 2019 proposing a new Tier 2
framework
• Proposes a new Tier 2 disclosure framework, referred to
‘Australian Accounting Standards – Simplified Disclosures’
• New Simplified Disclosures aim to reduce reporting burden for-
profit and NFP 2 entities