accounting standrad
Reporting entity: - “Reporting entities are defined as those entities (including economic entities) in respect of which it is reasonable to expect the existence of users dependent upon general purpose financial reports for information which will be useful to them for making and evaluating decisions about the allocation of scare resources.”(Paragraph 40, SAC 1), (Study guide, Accounting Theory; 2003, p.2-7). Factors to be considered in determining whether it is a reporting entity or not:- a) The economic or political importance or influence of the entity. b) The separation of management and ownership/economic interest. c) The financial characteristics of the entity. Ans 1(a) According to SAC 1 terminology, a company will be classified as a “reporting entity” only when there is a user dependent on it for financial report and there is no separation of management. As Emily Pty Ltd is a small proprietary Company and hence should not be classified as a reporting entity. Although according to question there are only 5 members as board of directors who holds 80% of the ordinary shares of the company and the remaining 20% of the shares been owned by their family members and the Company has 15 employees who have worked for the company for 15 years. Assuming that the employees are given information as and when they require the information and the 6 major suppliers are given the financial information assuming that they are not so big amount for the company to show the reports of company. Conclusion:- Emily Pty ltd is not classified as reporting entity as per SAC 1. Ans 1(b) Georgia Chemicals Pty Ltd is classified as a reporting entity simply as the 6 shareholders are involved in day-to-day operation of the company and can access to the information they needed. The company is dominating the pool of chemicals market, in Queensland and New South Wales, as they are planning to expand to other states also. Assumption : The company requires preparing financial report. However company is fairly large as it has sale of $ 20 million and in case of 200 employees there is likely to be a separation of economic interest and control. The only major creditor (a syndicate of banks to whom it owes $ 2 million) may demand for the financial report. Because there is only major creditor we can’t change it to any other creditor now and then also. And Moreover, Individual employees are unlikely to be able to command the preparation of financial reports tailored to meet, specifically, their information needs. (Solution manual, accounting theory, 2003,p-15) Conclusion:- Georgia chemicals Pty ltd can be classified as reporting entity as per SAC 1 Ans 2(a) Definition of liability:- SAC 4 Para 48 defines a liability as ‘the future sacrifice of economic benefits that a reporting entity is presently obliged to make to other entities as a result of past transaction or other past event.’ There are three main components to this definition, 1) Present obligation (SAC 4 Para 51-60) : There should be an obligation presently in existence to another party for a liability to exist.