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Oct 1989

Accounting down under. (Australia) (Accounting for International Operations)

by Stewart, Marie

    Abstract- The conduct of business in Australia is not as complex as it is in the US because of a smaller population and local infrastructure and because the the business climate is not as litigious. Additionally, Australia has the Uniform Companies Act and Uniform Tax Act which standardizes business taxes on a federal level and removes local business tax burdens. The Companies Act requires annual financial statements and companies are required to comply with the disclosure requirements of the Australian Stock Exchange. Australian accounting standards agree with international standards, and US Generally Accepted Accounting Practices are used for guidance in areas where standards are lacking. The differences between corporate practices between the US and Australia include: there are no treasury stock transactions; non-current assets can be carried on books at market value revaluation; and valuing inventories under the last in, first out accounting method is not allowed.

Australia's recent bicentennial celebration makes this an appropriate time to focus on the way those who live "Down Under" account for their business operations. Presented here is a general view of how accounting standards and company law effect companies operating in Australia.

Business in Australia is not as complex as it is in the U.S., due to some of the following factors:

9 Australia operates under both a Uniform Companies Act and a Uniform Tax Act. Accordingly, Australian business people only have to deal with a federal level of company and tax law.

9 Australia has only eight states and a population of 16 million.

9 The Australian business environment is not as litigious as in the U.S., and thus their legislation is less complex. Business Regulation

In 1981, the Australian Government enacted the Uniform Companies Act which standardized company law in all states and territories. Before this, each state and territory had its own company law, although there was much similarity among the various laws. The major advantage of the 1981 Act was referred to as "one stop shopping." The Act gave companies the ability to operate freely between states without the need to report their activities to each state on a separate basis.

The 1981 Act governs the types of corporations that can be formed, the rules of conduct of those corporations and their officers, and, in extensive detail, the form and content of financial statements. The body that enforces the provisions of the Act is the National Companies and Securities Commission (NCSC).

There are three basic types of corporations with limited (or in one case, no) liability that can be formed under the Companies Act:

* Private or Proprietary Limited (Pty Ltd) Company;

* Public or Limited (Ltd) Company; and

* No-Liability (NL) Company-available only to mining and oil companies.

There are two types of private companies, exempt proprietary and non-exempt proprietary. Exempt proprietary companies are those that are owned by individuals or other exempt proprietary companies. These companies have fewer reporting requirements and do not require an audit. If one or more of the shareholders of a proprietary company is a public or foreign company, it automatically becomes a non-exempt company. As such, it is subject to more stringent reporting requirements and must be audited.

Other types of companies and business organizations (for example, partnerships, trusts, incorporated and unincorporated joint ventures) can be set up under other Acts of Parliament. The decision to use these vehicles is more often than not driven by tax considerations.

Public companies are the only kinds of companies that can invite the public to subscribe for shares, debentures and other securities and be listed on stock exchanges. Accordingly, reporting requirements for public companies are the most stringent of all.

A U.S. company may operate in Australia by either becoming a registered foreign company or by setting up a locally incorporated subsidiary. The choice is usually based on tax considerations and financial statement filing requirements. Once a year, a registered foreign company must file a copy of its balance sheet and other documents as prepared under the laws of its place of incorporation. Companies Act Reporting Requirements

The Companies Act requires the directors of a company to present to the shareholders annual financial statements that give a "true and fair view" of the financial position of the company and the result of its operations for the year. An individual or an accounting firm having appropriate professional qualifications must audit these financial statements and express an opinion as to whether or not the financial statements give such a true and fair view. The term "true and fair" is not defined but has much the same significance as "present fairly" in U.S. audit reports.

Radical changes to the Companies Act were made in 1984 when a body known as the Accounting Standards Review Board (ASRB) was established to review and approve accounting standards. Through the end of 1988 ASRB had reviewed and approved 12 of the 21 accounting standards which had been issued by the professional accounting bodies (The Institute of Chartered Accountants in Australia and The Australian Society of Accountants). Compliance with the ASRB approved accounting standards is a legal requirement, whereas the remaining standards, although still important components of Australian GAAP, do not have the force of law. One interesting point is that the ASRB can invite any interested party, not just the professional accounting bodies, to submit proposed accounting standards.

Standards approved by the ASRB must be complied with except when doing so would not give a true and fail view. Directors and/or auditors who do not comply with ASRB approved accounting standards face fines and/or jail sentences under the Companies Act.

In addition to the general requirement of presenting a true and fair view, Schedule 7 of the Act contains several detailed rules for financial statement presentation and disclosure. One such requirement is that a standardized format (headings, names, order of items) of both the income statement and balance sheet be used.

Schedule 7 separates companies into "classes" on the basis of types of shareholders (i.e. publicly held or privately held corporations), and/or total revenue and assets. The class of companies comprising the smaller private companies may provide less detailed footnote disclosures. For example, an exempt proprietary company need only provide footnotes on unearned revenue, auditor's remuneration, capital expenditures, leasing activities and other commitments and contingent liabilities. However, there is an overriding requirement that any footnote disclosures necessary for a true and fair view must also be included. Sources of Australian GAAP

Beyond the requirements of company law, there are two other sources of GAAP in Australia:

9 ASRB Approved Accounting Standards-ASRBs; and

9 Statements of Australian Accounting Standards-AASs.

ASRBs. As noted, the ASRB was set up to consider existing and proposed accounting standards and to approve and give legislative backing to such standards. Generally, the ASRBs are consistent with the requirements of the original AAS before it was submitted to the Board.

However, ASRB 1012, which deals with foreign currency, changed the way companies account for exchange gains and losses and has, in turn, required a change to the underlying accounting standard-AAS 20. The business community is trying to decide if the ASRB was simply flexing its muscles or whether further revisions by the ASRB to the AASs can be expected.

AASs. AASs are promulgated by the joint Australian accounting bodies. They do not have statutory powers but derive authority from:

9 The accounting bodies, which may take disciplinary action against any of their members responsible for financial statements whether as preparer or auditor, that do not follow AAS requirements;

9 Their strong persuasive power as interpretations of what is "true and fair;"

9 The likelihood of a qualified audit report if they are not complied with. Stock Exchange Requirements

Listed companies must also comply with the disclosure requirements of the Australian Stock Exchange (ASX). These additional disclosures include:

9 Details of the maximum contingent liability in relation to termination benefits under service agreements with directors and management;

9 Details of substantial shareholders (namely the 20 largest shareholders and the distribution of shares among shareholders).

Listed companies must make a preliminary announcement of their income or loss for the year within three months of year end, and issue an unaudited statement of their operations for the first six months of the year within three months of the half-year end. Differences Between U.S. and Australian GAAP

In general, the Australian AASs and ASRBs agree with International Accounting Standards and U.S. GAAP. If there is no Australian GAAP that deals with a particular accounting issue, it is common practice to look to U.S. GAAP for guidance. The more frequently encountered differences between U.S. and Australian GAAP are the following:

* The LIFO method of valuing inventories is not allowed.

* The liability method of accounting for deferred taxes is used. (This was a major difference before SFAS 96 was issued. However, the Australian standard is not as complex as SFAS 96.) Net of tax accounting is not allowed.

* The pooling-of-interests method of accounting for business combinations is not allowed.

* Changes in accounting policies or the introduction of new accounting standards cannot be retroactively applied as adjustments to the prior years' financial statements. Instead they are shown as adjustments to beginning retained earnings of the most recent year presented.

* A company is prohibited from dealing in its own shares, therefore there are no treasury stock transactions.

* Non-current assets can be revalued to market value and carried on the books at such values. The accounting treatment is to increase the carrying value of the asset and to set up an "Asset Revaluation Reserve." Gains on revaluations cannot be included in operating income. Conclusion

Australian accounting standards do not provide the same degree of detailed regulation that we are familiar with in the U.S. and, in several areas, have reached significantly different conclusions.

Marie Stewart

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