Understanding Management Accounting vs Financial Accounting

WEEK 5 1.You have heard that management accounting is not regulated by accounting rules, under the premise that companies should be allowed to adopt methods and procedures that are best suited for them. Why does financial accounting not have the same degree of freedom? The difference arises from the different uses of the information. MA is prepared for internal use by managers within the organisation while FA is targeted at external users. Without accounting rules there is much greater risk that unscrupulous directors will adopt accounting policies and practices that portray an unrealistic view of financial health. There is also the greater risk that financial statements will not be comparable over time or with those of other businesses. Accounting rules can narrow areas of differences and reduce the variety of accounting methods. 2.Describe the key components of the annual report, including an explanation of the purpose of each report element. 1.A statement disclosing the extent to which they have followed the ASX principles of Good Corporate Governance and Best Practice recommendations. Where recommendations have not been followed, these must be identified and reasons given for not following them. 2.AASB1010 requires that the entity present a complete set of financial statements including a statement of financial position, statement of financial performance, statement of changes in equity, statement of cash flows and explanatory notes. 3.Together with all standard accounts the statement of financial position must also contain a listing of investment property, biological assets, total of assets for sale and non-controlling interests (also known as minority interests). Companies are also required to disclose additional information where it is relevant to an understanding of the financial position of the business. 4.AASB1010 also stipulates that the statement of financial position distinguishes between current and non- current assets and between current and non-current liabilities. The standard accepts that for some companies (e.g. financial institutions) it may be more appropriate to order items according to their liquidity (i.e. their nearness to cash). 5.The annual report must also include a statement of comprehensive income including both realised and unrealised gains and losses. 3.When is a group or consolidated accounts required, and what is the purpose of their separation? • Group or consolidated accounts are needed when a company requires a controlling interest of the ordinary voting shares of another company. • Their overall aim is to show the accounts as if the parent had owned and operated all of the assets of the business directly, rather than via a set of subsidiaries. • The parent company is required to provide financial accounts that relate to its own performance as a single company, but also to provide a set of group accounts. 4.The Australian Accounting Standards Board (AASB) has adopted International Accounting Standards (IAS) for financial reporting. Must your marginally profitable proprietary company with absolutely no dealings outside of Australia comply with IAS? If you have to comply, does IAS allow firms to adjust the standard where strict compliance will not provide true and fair reporting? Explain. Yes, it must comply. The AASB has adopted IAS for 'for profit' organisations. Companies are required by law to comply with the accounting standards. This should result in greater consistency and comparability in application and assessment. If management considers complying with a particular accounting standard will prevent a true and fair view of the financial position or performance, the still must adhere to the standard. They can then, if they choose, provide additional information in the note about their concerns over applying that standard.