ACC706 Accounting Theory Assignment Sample

• Subject Code : ACC706
• University : Kings Own Institute My Assignment Services is not sponsored or endorsed by this college or university.
• Subject Name : Accounting

Critical Evaluation of 2019 Annual Report of Rio Tinto Limited

Contents

Introduction

General Purpose Financial Statements requirements in Australia

Conditions for Applicability of the General Purpose Financial Statements requirements

Obligations under the New Conceptual Framework

Requirements for Global Financial Statements

Compliance with Australian Accounting Standards

Disclosures required to be made

Requirement to provide Comparative Information

Critical Evaluation of above Compliances by Rio Tinto Limited in its 2019 Annual Report

Compliance with Australian Accounting Standards/ IFRS

Disclosures under Tier 1

Compliance with the recognition criteria provided by New Conceptual Framework 

Conclusion

References

Introduction

This report will provide a detailed explanation of the General Purpose Financial Statements requirements in Australia and also the requirements under the revised conceptual framework. The report will then evaluate the 2019 Annual Report of Rio Limited in relation to these requirements and will comment on whether the company has fulfilled these requirements properly.

GPFS Requirements in Australia

The requirement for preparation and lodgment of General Purpose Financial Statements was introduced in Australia according to the provisions of the Tax Administration Act 1953. Under these new requirements, an entity that is a significant global organization must file its General Purpose Financial Statements with the Australian Securities and Investment Commission for each particular income year for which they are required to file it. As provided in the Auditing and Assurance Standard 101, relating to Presentation of Financial Statements, the General Purpose Financial Statements are those set of financial reports that are aimed at meeting the requirements of users of those who can rely on the those financial reports without requiring the financial reports to be modified as per their information needs.

Also under these provisions, those entities that have not already lodged their General Purpose Financial Statements with the ASIC for each year for which they were supposed to lodge its general purpose financial statements must submit its GPFS for the said years with the Australian Taxation Office by its due date of filing its tax return, which is usually 6 and a half months after its date of balance sheet (ASIC, n.d.).

The Australian taxation Office released certain guidelines on interpretation and application of the General Purpose Financial Statements reporting requirements by the relevant Australian entities. These guidelines were intended to provide clarification on a number of issues relating to interpretation of GPFS requirements.

Conditions for Applicability of the GPFS Requirements

• The General Purpose Financial reports requirements are applicable to an entity only if it can be regarded as a significant global entity for the purpose of taxation. In order for an entity to be recognized as a significant global entity for tax purposes it is required that the total consolidated income of the global parent entity or that entity alone is more than AUD $1 billion. A global parent entity is an entity which is not subject to the control of any other entity. Hence, it is clear from this definition that a global parent entity may not be registered, formed or even operating in Australia. Also, a global public entity need not mandatorily be controlled by another entity, it can exist as a single entity itself.

• It must be noted that the entities are required to file their General Purpose Financial Statements with the ATO only when they have not already filed the same with the Australian Securities and Investment Commission (KPMG, 2019). At present, the following entities are required to file their financial reports with the Australian Securities and Investment Commission as per the provisions of Corporations Act.

1. Registered schemes

2. Public companies

3. Small proprietary companies controlled by a foreign company

4. Entities undertaking crowd-source funding

5. Large proprietaries

6. Notified foreign passport funds

Therefore, these companies can only file its General Purpose Financial Statements with the ASIC and need not require filing the same with the Australian Taxation Office.

• The requirement to lodge the General Purpose Financial Statements with the ASIC was made compulsory from the years commencing on or after 1 July 2016, therefore now these requirements are applicable generally for all the years to come.

Obligations under the New Conceptual Framework

The revised conceptual framework for financial reporting was issued by the the Australian Accounting Standards Board in the mid of year 2019 and it is applicable for accounting periods that commence on or after 01.01.2020 (AASB, 2019). The main purpose of AASB behind issuing the revised conceptual framework is to provide guidance to the entities in recognition and measurement of their assets, liabilities, income and expenses for those situations which are not directly covered by any Australian Accounting Standard (KPMG, 2018). The revised conceptual framework has provided new definitions for assets and liabilities and also certain revised criteria for recognizing the assets and liabilities in the financial statements (BDO Australia, n.d.). It also provides some new facts and criteria relating to measurement of appropriate basis of measurement and presentation of items in the statement of income and statement of other comprehensive income.

Requirements for Global Financial Statements

The entities that are required to prepare Global Financial Statements must ensure that its General Purpose Financial Statements fulfill the following compulsory requirements:

Compliance with Australian Accounting Standards

A global parent entity must ensure that its financial statements are prepared in strict compliance with the Australian Accounting Standards. Australian Accounting standards are those accounting standards which have been issued by the Australian Auditing and Assurance Standards Board for application by Australian entities and may be similar or different from the International Financial Reporting Standards (BDO Australia, n.d.). . In those cases, where the Australian Accounting Standards cannot be complied, then commercially accepted principles can be applied which are capable of providing a true and fair picture of financial position and financial performance of the entity for the said financial year.

For the purpose of compliance with Accounting Standards – the requirements have been grouped into two tiers - Tier 1 and Tier 2. The entities that fall under Tire 1 will have make full compliance with the Australian Accounting Standards, which have followed the IFRS issued by IASB into these Australian Accounting Standards and include certain requirements that are specifically related to Australian Entities (Deloitte Australia,2019.). The entities that under Tier 2 will also have to adhere to the Australian Accounting Standards, including the recognition criteria for assets and liabilities and measurement basis that are covered in Tier 1, but these entities will be able to get certain relaxations in terms of disclosure requirements.

Disclosures required to be made

The General Purpose Financial Statements must include some mandatory disclosures. However, the level of disclosure that is to be made by different entities depends on whether they fall in Tier 1 or Tier 2 in relation to adherence with the Australian Accounting Standards.

Common disclosures between Tier 1 and Tier 2 entities

The following mandatory disclosures will have to be made both by entities falling in Tier 1 and those falling in Tier 2.

• Breakdown of important and material account balances into subparts and additional notes be provided for significant parts.

• Complete general information about the organization.

• Disclosure of all major accounting policies applied by the entity

• Significant accounting judgments made by the entity and those areas in the financial statements where a lot of estimation uncertainty is involved.

• Complete information relating to revenue of the organization

• Preparation of complete set of primary financial statements which includes- profit and loss statements and statement of other comprehensive income, balance sheet, statement showing changes in equity and full cash flow statement.

(Deloitte Australia, 2019)

Additional disclosures to be made by Tier 1 entities

• Complete disclosure of the effect of new and revised accounting standards

• Detailed information about different operating segments of the company.

• Detailed information in relation to income taxes recorded by the company including any contingent liabilities (Tier 2 entities have to make limited disclosures).

• Detailed information related to discontinued operations of the company (Tier 2 entities have to make limited disclosures)

• Complete information in relation to impairment losses (Tier 2 entities have to make limited disclosures)

• Complete information in relation to fair value measurements made by the entity(Tier 2 entities have to make limited disclosures)

• Complete reconciliation of movements in the value of non-current assets. (Tier 2 entities have to make limited disclosures)

• Complete detailed information in relation to contingent liabilities and contingent assets of the entity (Tier 2 entities have to make limited disclosures.

• Complete information in relation to information paid to auditors.

(Deloitte Australia, 2019)

Requirement to provide Comparative Information

The General Purpose Financial Statements that have been prepared as per the Australian Accounting Standards must present comparative information for previous year corresponding to the income year for which financial statements have been prepared (Deloitte Australia, 2019). Moreover, the entities are also required to provide narratives for the comparatives where it would be required so as to be enabling the users to understand the financial statements of current period. This requirement to provide comparatives is not applicable to the year in which the company is incorporated.

Critical Evaluation of above Compliances by Rio Tinto Limited in its 2019 Annual Report

Compliance with Australian Accounting Standards/ IFRS

The financial statements of Rio Tinto Ltd have been prepared in adherence with all the International Financial Reporting Standards, the Companies Act 2006, laws applicable in the UK and the Australian laws as provided by the ASIC (Rio Tinto, 2019). The requirement to prepare General Purpose Financial Statements is applicable on the company and its financial reports of year 2019.

Disclosures under Tier 1

Rio Tinto Limited has provided all the required information and disclosures that are required to be made by a Tier 1 entity as described above

1. Complete General information

The company has made a full disclosure of its general information such as its principal activities, major products extracted by the company, the countries in which it has its business operations, complete details of registered office etc (as provided in page 152 of 2019 Annual Report, please refer appendix 1).

2. Consolidation of Accounts

The company has prepared consolidated financial statements of its main group and its all subsidiaries as required by the Australian law and the ASIC (please refer appendix 1).

3. Changes in accounting standards and their impact

The company has disclosed about the changes in IFRS 3, Business Combinations and has also disclosed of this change that due to these changes, any investments made by the company in new operations will have to be recorded in books of accounts as acquisition of assets instead of recording it as business combination (Rio Tinto, 2019). The company has also disclosed about the changes in IAS 1 and IAS 8 and has made the disclosure that it is evaluating the effect of these amendments on the presentation of its financial statements (please refer appendix 2).

4. Significant accounting judgments and estimation uncertainty

The company has made proper disclosure of those judgments made in its financial statements that have a major effect on its financial statements. The major accounting judgments made by the company are – impairment of non-current assets, estimation of useful life of assets, estimation of amount provision to be recognized in relation to onerous contracts and estimation of environmental obligations (Rio Tinto, 2019). The company has also disclosed the primary sources of estimation uncertainty (please refer appendix 3).

5. Details of sales revenue

The company has provided complete details of its sales revenue in its notes to financial statement.

6. Comparatives

The company has provided all comparative information, wherever required including narratives.

7. Others

The company has complied with all other disclosure requirements that are applicable to Tier 1 entities including:

• Proper disclosure of principal accounting policies applied by the company.

• Full disclosure in relation to impairment losses.

• reconciliation of movements in the value of non-current asset

Compliance with the recognition criteria provided by New Conceptual Framework

The company has prepared its financial statements in accordance with the 2018 Conceptual Framework and the Reduced Disclosure Framework that is applicable to the UK entities. At present the recognition of assets and liabilities has been done on the basis of relevant IFRS that is applicable to that asset/liability (Rio Tinto, 2019). However, the company has not yet complied with the revised conceptual framework but it has made a statement in its 2019 Annual Report that it will follow the revised conceptual framework from the year 2020.

Conclusion

On the basis of above analysis and discussions, it has been concluded that company has prepared its Financial Statements in accordance with the General Purpose Financial Statements requirements in Australia. The company has complied with the IFRS and made all the required disclosures under Tier1. Although, the company has not complied with revised conceptual framework since it is applicable from year 2020, it has duly complied with the old conceptual framework.

References

AASB. (2019). Conceptual Framework for Financial Reporting. Retrieved from https://www.aasb.gov.au/admin/file/content105/c9/Conceptual_Framework_05-19.pdf ASIC. (n.d.). Lodgement of financial reports. Retrieved from https://asic.gov.au/regulatory-resources/financial-reporting-and-audit/preparers-of-financial-reports/lodgement-of-financial-reports/

BDO Australia. New Conceptual Framework – Who will it apply to and when? Retrieved from https://www.bdo.com.au/en-au/accounting-news/accounting-news-july-2019/conceptual-framework

Deloitte Australia. (2019). Clarity in financial reporting. Retrieved from https://www2.deloitte.com/content/dam/Deloitte/au/Documents/audit/deloitte-au-audit-clarity-general-purpose-financial-statements-updated-ato-april-2019-guidance-280519.pdf

KPMG. (2018). 18RU-001 The new Conceptual Framework – is special purpose going?. Retrieved from https://home.kpmg/au/en/home/insights/2018/05/18ru-001-applying-iasb-conceptual-framework-australia.html

KPMG. (2019). ATO provision of general purpose financial statements. Retrieved from https://assets.kpmg/content/dam/kpmg/au/pdf/2019/ato-provision-general-purpose-financial-statements-kpmg-guide.pdf

Rio Tinto. (2019). Annual Report. Retrieved from https://www.riotinto.com/en/invest/reports/annual-report

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