Teori Akuntansi

1. Adoptinganaccountingperspective
Questions
1.Do accountants really constructtheirown reality with respectto whatis
measuredandreportedbyanentity?Inasense,hasn’ttheaccountingprofession
codifiedacceptanceofthisinbroadlydefiningreportingentitiesinAASB 1025?
Discuss.
TheanswertothisquestionwithrespecttoAASB 1025isfoundbelowatquestion14.
Accountantshaveconsiderablediscretioninclassifying,measuringandreportingthe
economicactivitiesofanentity.Theycandefinetheboundariesofanoperatingentity
and,ashighlightedinseveralcasesinthischapter,canatanytimedividethefirm into
anynumberofoperatingentitiesinaccordancewiththeirpreferences.Althoughthere
are legislated accounting standards and disclosure requirements, there is
considerable discretion as to the nature and extentofboth measurementand
disclosureofaccountinginformation.Atthebasiclevel,accountingisafunctionof
humanactivity,anextension(function)ofourexistence—sowedefineit.
2.Withrespecttotheproprietarytheory:
(a)Whatistheobjectiveofthefirm?
(b)Howimportantistheconceptof‘stewardship’?
(c)Whatistherelationshipbetweenassets/liabilitiesandtheowner?
(d)Howwouldyoudefinerevenues,expenses,profit?
(e)Whatarethreeeffectsoncurrentpractice?
(f)Whatarethetheory’slimitations?
(a)Thefirm essentiallyistheproprietor.Thefirm issimplytheproprietor’sinstrument
toachievehisorherpurpose,whichistoincreasehisorherwealth.Income
representstheincreaseinthewealthoftheproprietorinagivenperiod.
(b)Stewardshipisrelativelyunimportant,becauseaccountabilitytooutsidepartiesis
notcritical.Theproprietoris,ineffect,thefirm,andthereforeisinaprivileged
positiontoknowwhatishappening.Liabilitiesareusuallyshortterm,andtherefore
thereisnoneedtogiveacontinualaccountingtocreditors.
(c)Theassetsare‘owned’bytheowner,andtheliabilitiesare‘owed’bytheowner.
Thisshowsthatthereisnoseparationbetweenthefirm andtheowner.Inthe
accountingequation,Pstandsforthenetworthoftheowner.
A–L=P
(d)Revenueistheincreaseinproprietorship;expenseisthedecreaseinproprietorship;
andprofitistheneteffectofproprietorship,excludingadditionalinvestmentsand
withdrawalsbytheowner.Revenueandexpenseaccountsaretrulysubsidiary
accountsofP.Theyhavethesamealgebraiccharacteristicas‘networth’—
increasesinnetwortharecreditsanddecreasesinnetwortharedebits.The

2. proprietarytheoryfocusesonPinviewingincome.Revenuesandexpensesare
causedbythedecisionsandactionsoftheproprietor.Theprofitofthefirm
belongstotheproprietorandthatiswhyPisaffectedintheaccountingequation.
(e)Thefollowingareexamplesoftheeffectoftheproprietarytheoryonaccounting
practice:
 Dividendspaidareadistributionofearnings,notanexpense;andinterest
chargesareanexpense.
 Inasoleproprietorshiporpartnership,salariestoownerswhoworkinthefirm
arenotconsideredanexpenseofthebusiness.Thereasonisthatthefirm and
theownerarenotseparateentities;theyarethesame.
 Theequitymethodforlong-terminvestmentsfocusesontheproprietaryinterest
oftheinvestorcompanyintheinvestedcompany.
 Theparentcompanytheoryforconsolidatingfinancialstatementsviewsthe
parentas‘owning’thesubsidiary.Minorityinterestisconsideredan‘outside’
claim,andlogicallyshouldthereforebealiabilityontheconsolidatedstatement
offinancialposition.
 Thepoolingofinterestsmethodforbusinesscombinationsemphasisesthe
uniting(pooling)oftheowners’interestsofthetwocombiningcompanies.
 Commontermsusedrevealtheproprietaryinterestsofownersare:bookvalue
pershare,earningspershareandincometoshareholders.
 Theuseoftheconsumerpriceindexforgeneralpriceleveladjustmentsshows
thatthe‘consumerdesires’ofownersareconsidered.
 Thefinancialcapitalviewispertinenttoowners.
(f)Theproprietarytheorydoesnotaccordwiththerealitiesofthelargecorporation.
Thelawrecognisesthecorporationasaseparateentity,distinctfrom theowners.
Thecorporation—nottheshareholders—owns(controls)theassets,andisliable
forthedebts.Forthelargecorporation,withdrawalsofcashorotherassetsby
shareholderscannotbemadewithoutrunningafoulofthelaw.Thisshowsthatthe
ownershiprightsofshareholdersarelimited.Accountabilitytoshareholdersis
significant;otherwise,shareholders have no knowledge ofthe status and
operationsofthebusiness.Theassumptionsoftheproprietarytheoryarenot
relevanttotheshareholdersoflargefirms.
3.Withrespecttotheentitytheory:
(a)Whatarethereasonsforconcentratingontheentityasaunitofaccountability
ratherthantheproprietor?
(b)Whatistheobjectiveofaccounting?
(c)Howimportantistheconceptof‘networth’?
(d)WhatisthereasonformodifyingtheaccountingequationtoAssets=Equities?
(e)Onwhatsideoftheequationin(d)wouldretainedprofitsappear?
(f)Whyisthereastressonprofitdetermination?
(g)How do theconceptsofrevenues,expensesand profitsdifferfrom the
proprietarytheory?Whataboutinterestcharges,dividendsandincometax?

3. (h)Whatarethreeeffectsoncurrentpractice?
(a)Emphasisisontheentity,becauseinthe20thcenturytheseparationofowners
from managementinthecorporateform ofbusinessiscommon.Shareholdersof
largecorporationshavelittlepowertomakedecisionsforthecompany.The
corporation,theentity,hasalifeofitsown.Itisthereforemorerealistictoviewthe
entityastheunitofaccountability—thatis,toseetheaccountingprocessfromthe
pointofviewoftheentity.Itistheentity(throughitsmanagement)thathasthe
powertomakedecisionsthataffectthefinancialstatusandoperationsofthe
business.
(b)Stewardshiporaccountabilitytoequityholdersisofprimarysignificance.Theentity
needstogiveanaccountingtothosewhohavesuppliedfunds(shareholdersand
creditors).Therearetwoviewsoftheentitytheory,butbothstressaccountabilityto
equityholders. The conventional view emphasises stewardship because
equityholdersareseenas‘associates’inbusiness.Thenewerview focuseson
stewardshipbecauseoflegal,contractualrequirements,andalsotomaintaingood
relationswithequityholdersintheeventthecompanymayneedmorefunds.
(c)Thenetworthoftheownerisnotameaningfulconcept,becausetheownerisnot
recognisedassuchbutasanequityholder,aprovideroffunds.So-calledowners
arenotseenashavingthepowertomakedecisionsforthefirm.Thenetassets
belongtotheentity.However,networthcanbeameaningfulconcept.Anargument
canbemadethattheentityneedstoknowtheworthofitsnetassetsforitsown
purposes.
(d)Thereasonisthattheentityisthefocusofattention,andthereforecreditorsand
ownersareseensimplyasthosewhosuppliedthefundstotheentity.Their
financialinterestinthecompanyis‘equities’—claimsontheassets.Thus,theyare
seenasequityholders.Theirrelationshipwiththecompanyisacontractualone.
(e)PatonandLittletonarguethattheshareholdershaveacontractualresidualclaim
ontheassets,anditisforthisreasonthatincomeisplacedintheretained
earningsaccount.Shareholdersgettheleftoversafterthecreditorshavebeenpaid,
intheeventofliquidationofthecompany.Thenewerviewoftheentitytheorysees
retainedearningsasthefirm’sequityorinvestmentinitself.
(f)Profitisstressedfortworeasons:
 Profitiswhatequityholdersareinterestedin,becauseitrepresentstheresults
oftheirinvestmentinthecompany
 Thefirmisinbusinesstomakeaprofit—profitisessentialtothefirm’ssurvival.
(g)Revenueistheinflow ofassets(increaseintotalassets)duetotheevents
undertakenbythefirm withregardtoitsoutput.Undertheproprietarytheory,
revenueistheincreaseinproprietorship.Expenseisthedecreaseinassetsor

4. increaseofliabilitiesduetotheconsumptionofassetsandservicesbythefirm to
generatecurrentrevenue.Underproprietarytheory,expenseisthedecreasein
proprietorship.
Forboth theentityand proprietarytheories,profitisthedifferencebetween
revenuesandexpenses.Theentitytheory,however,emphasisestheleftsideofthe
accountingequation(assets),whereastheproprietarytheoryconcentratesonthe
rightside(proprietorship).Theentitytheoryfocusesonwhattheentitydoes,its
performance; whereas the proprietary theory focuses on the effect on
proprietorship.
Forthetraditionalentitytheory,interestcharges,dividendsandincometaxes
shouldbedistributionsofearnings.Thetheoryconsiderstheseaspaymentstothe
equityholdersfortheuseoftheirfunds.Ofcourse,thegovernmentdoesnot
providefundsastheothers,butprovidesintangibleservices(funds?)suchas
protectionfromforeignpowers.Thenewerversionoftheentitytheoryseesinterest
charges,dividendsandincometaxesaspaymentsto‘outsiders’,andthereforethey
areexpenses.
(h)Althoughconventionalaccountingtheorysubscribestotheentitytheory,thetheory
has had little effecton actualpractice.The reason is thatthe theory was
formulatedinthe20thcentury,andmanycurrentpracticesweredevisedsincethe
timeoftheItalian city–statesand arebased on theproprietarytheory.The
followingshowtheeffectoftheentitytheoryonpractice:
 Thephysicalcapitalviewisinconsonancewiththeentitytheory.
 Salariestocorporateemployeeswhoarealsoshareholdersareexpenses,
becausethecompanyisaseparate,distinctentityfromtheholders.
 Inconsolidatingfinancialstatements,anentitytheoreticalapproachcanbe
taken.Insteadofconcentratingontheproprietaryinterestoftheparent(parent
companytheory),theentitytheoryseestheconsolidationfromthepointofview
oftheconsolidatedentity.
 Theuseofprofitandcostcentresforinternalpurposesisbasedontheentity
theory.Thecentreisseenasanindividualentity.
4.Withrespecttothefundtheory:
(a)Whatare‘restrictionsonassets’?
(b)Howisthestatementoffinancialpositionviewed?
(c)Howmeaningfulisthestatementoffinancialperformance?
(a)Restrictionsonassetsareliabilitiesandowners’equity.Usuallyliabilitiesand
owners’equityareseenasclaimsontheassets,butVatterarguesthatclaimsdo
notariseagainstassets,butagainstpeople.Thefundattemptstobeimpersonal.
Liabilitiesrepresentfuturepayments;thereforethesignificanceofliabilitiesisthe
restrictiontheyplaceontheassets,theearmarkingofacertainportionforfuture
payment.Theowners’equityrepresentsafinal,residualrestrictionontheassets.
(b)Thestatementoffinancialpositionisseenasan‘inventorystatement’ofassets

5. andtherestrictionsonthem.
(c)Thestatementoffinancialperformanceisnotconsideredmeaningful.Thereare
toomanyproblemsindeterminingincome.Thegeneral-purposestatementof
financialperformanceislimitedinitsusefulness,becausedifferenttypesofusers
needdifferentkindsofinformation.Informationshouldbereportedinsuchaway
thatusers,iftheywished,cancalculatetheirownincomefigure.Butthefocus
shouldbeontheflowoffundsratherthanincome.
5.Withrespecttothecommandertheory:
(a)Whoisthe‘commander’?
(b)Whatistheroleof‘ownership’?
(c)How are the statementoffinancialposition and statementoffinancial
performanceviewed?
(a)Acommanderisanypersonwhohascommandorcontroloverresources.The
generalmanagerofacompanywouldbethetopcommander,andtheotherofficers
wouldbehisorherstaff,whointurnmaybecommandersoverasmallersetof
resources.Aholderisacommanderoverhisorherownresources.Thepointofthe
commandertheoryiseconomiccontroloverresources,andsuchcontrolisinthe
hands ofpeople;thus,the theory focuses on people — people who are
commanders.
(b)Ownershipisnotmeaningfulinthistheory.Rather,itiscontrolovereconomic
resources.Theemphasisshouldbeontheeconomicfunctionofpeopleratherthan
theirlegalrelationshiptothefirm.
(c)Thefinancialstatementsarereportsfrom thecommanderofthecompanyto
commandersofthefundsthatwereprovidedtothecompany.Thestatementof
financialperformanceisanexplanationoftheresultsofactivitiesinagivenperiod
initiatedbythecommanderandstaff.Theresultsarefrom thecommander’spoint
ofview.Heorsheisexplainingwhattypesofexpenditurewereincurredandwhat
the resultis.The statementoffinancialposition is truly a statementof
accountabilityofthecommanderofthecompany.Itshowsthesourcesfromwhich
thecommanderhasreceivedresourcesandtheapplicationsoftheseresources.
Thestatementoffinancialpositionisastatementofstewardshipratherthanof
ownership;itisastatementofaccountability.
6.(a)Cantherebean‘investortheory’,giventhebroadrangeofinvestorobjectives?
(b)Doinvestorshaveuniforminformationneedsthatfitwithinasingletheory?
Investorswantinformation so thattheycan predictthefuturecash receiptsto
themselvesduetotheirrelationshipwiththecompany.Futurecashreceiptsdepend
on:
 thecompany’sabilitytodisbursecash

6.  thewillingnessofthecompanytopayinvestors
 thelegalpriorityoftheinvestor’sclaim.
Financialstatementscanprovideinformationespeciallyonthefirstandsecond
factors.
7.Withrespecttotheenterprisetheory:
(a)Whatisprofit?
(b)Whatrelevance do you see in the ‘value added’statementoffinancial
performance?
(c)Howrealisticaretheimplicationsofthetheory?
(d)Explaintherelationship,ifany,betweenenterprisetheoryandtriplebottom-
lineaccounting.
(a)Profitisvalue-addedincome.Thefigureshowsthecompany’scontributionto
society—thatis,thewealthcreatedbythecompanyinagivenperiod.Anotherway
oflookingatthisistosayvalue-addedincomemeasuresthedistributiontothe
participantsintheentity— employees,holders,creditorsandgovernment.Ofthe
totalsalesoftheoutputofthecompany,theamountisdividedasfollows:wages
andsalariestoemployees,dividendstoholders,interesttocreditors,incometaxes
togovernment,andtheresidualtothecompanyitselfforfutureexpansionor
replacementofassets.
(b)Thisisanopinionquestion.IntheUnitedKingdom,itisestimatedthatatleast20%
ofthelistedcorporationsnowpublishavalue-addedstatementassupplementary
data.Somebelievethatthevalue-addedincomeisbecomingmoreimportant
becauseitreflectsasocialchange— holdershavebecomelesspowerfuland
organisedlabourandgovernmentmorepowerful.Manypeopleinsocietywantto
knowwhatthecontributionofacompanyistotheeconomicwellbeingofsociety,
andhowthe‘pie’(thecontribution)isdividedforacompany.Whatisa‘fair’division
isamatterofopinion,andultimatelydependsonthevaluesofthepeopleofthe
givensociety.
(c)Thetheoryimpliesthattheparticipantsaretocooperateintheirendeavourto
createprofit.Managementisto serveasmediator.Theparticipantsneed to
cooperateifthefirm istosurvive.Theideaofthecooperativeeffortofholders,
creditors,employeesandgovernmentdoesnotappeartoberealisticatpresentin
Australia.History,traditionandvaluesaresuchthatcooperationdoesnotappear
likelyintheforeseeablefuture.However,economicstresscouldchangepeople’s
attitudes.ItisinterestingtonotethattheJapanesemodeloftheenterprisedoes
takeseriouslytheneedforemployeestohaveaparticipatoryroleindecision
makinginthecompany;andtherepresentativesofgovernmentdoappeartofeel
obligatedtohelpcompanieswithbasicresearchandtaxrelief,andtocreatean
environmentthatis‘pro’business.

7. (d)Enterprise theory and triple bottom-line accounting are very similarin the
underlying view thata corporation hassocialresponsibilitiesthatshould be
reported.Enterprisetheoryhasbeenmorefocusedonquantifyingtheseimpacts,
whereastriplebottom-lineaccountinghasopenedoutreportingtobothquantitative
andqualitativeinformation.
8.Basedoninformationfrom theconventionalstatementoffinancialperformance
ofInbergLtdforthecurrentyear,prepareavalue-addedstatement.
Salesrevenue $5000Incometax $800
Materialsused 1200Electricityexpense 300
Salariesandwagesexpenses 900Interestexpense 200
Depreciationexpense 400Dividendspaid 300
Althoughnotaskedfor,aconventionalstatementoffinancialperformanceisalso
preparedforpurposesofcomparison.
STATEMENTOFFINANCIALPERFORMANCE
(conventional)
Sales $5000
Less:
Materialsused $1200
Electricity 300
Salariesandwages 900
Depreciationexpense 400
Interestexpense 2003000
Profitbeforetax $2000
Incometax 800
Netprofit $1200
Lessdividends 300
Retainedprofits $900
VALUE-ADDEDSTATEMENT
Sales $5000
Less:materials,depreciationandservicesused
($1200+$400+$300) 1900
Valueadded $3100
Distributionofvalueadded:

8. Toemployees $900
Toprovidersofcapital
Dividends $300
Interest 200500
Togovernment 800
Toenterpriseforexpansion
Retainedprofits 900
$3100
9.(a)Triplebottom-linereportsseektodetailtheactivitiesofanentityastheyrelate
tosociety,theeconomyandenvironment.Istheannualreportofanentityan
appropriatevehicleforsuchabroadbaseofinformation?
(b)Listthetypeofinformationthatyouconsiderwouldberelevanttothetriple
bottom-lineapproach.Whatwouldbethe‘bottomline’insuchastatement?
(a)Annualreportsinitiallybeganaslegaldocuments,whichreportedfinancialposition
andperformanceandfulfilledlegislativerequirementssuchasnamesofkeyoffice
holdersanddirectors.Inmorerecenttimestheannualreporthasbeenseenasa
keydevicenotonlytosummarisepastperformance,butalsotosignalthefuture
activitiesandminimisepoliticalcosts,andperhapsinfluenceperceptionsoffirm
value.With quarterlyreporting and therequirementto reportimmediatelyon
significantfactorsthatcanaffectafirm’svalue(understockexchangelisting
requirements),informationconcerningfinancialperformanceismoreimmediate
andreadilyavailable.Thismeansthattheannualreportisincreasinglyusedasa
signalling device to keylobbygroups.Is itappropriate forthis purpose?It
representsaformalcommunicationfrom thefirm andthereforecarriesabasic
authority.Itprovidesaclearchannelofcommunicationandallowsfirmsaplatform
inwhichtolegitimisecommunicationspertainingtotheiractivities,bothactualand
proposed.However,itshould be considered whetherlobby groups and key
stakeholdersaccepttheinformationprovidedingoodfaith.Theinstructormight
liketotakesomeexamplesofannualreportstoclassandaskstudentstoconsider
whethertheyareeffectivecommunicationdevicesorsimplypoliticalstatements.
(b)Getstudentstoclassifytheinformationaccordingtocategoriessuchassocial,
employee,environmental,economicandcommunity-based.Intermsofanactual
‘bottom-line’,thisdoesnotexistbecauseitisnotaboutderivingasingleoutcome,
suchasprofit,butaboutidentifyingthepositiveandnegativeimpactsofthe
entity’sactivitiesonabroadrangeofstakeholders.
10.Acompanydeclaresa10% dividend.Discussthenatureofthedividendtothe
recipientsfromthepointofviewofthefollowingtheories:
(a)proprietarytheory (d)fundtheory
(b)entitytheory (e)investortheory
(c)commandertheory (f)enterprisetheory.
(a)Undertheproprietarytheory,thefirm isconsideredaninstrumentoftheholdersto
achievetheirobjectiveofincreasingtheirwealth.Holders’equitybelongstothe

9. holders,andthereforeadividend,whichissimplyaredistributionfrom retained
earningstocapital,isjustanother‘pieceofpaper’torepresentthesamedollar
amountofownershipinterest.Thedividendisnotincometotheholders;theyare
notreceivinganythingbeyondwhattheyhadbeforeinthecompany.
(b)Undertheentitytheory(eithertraditionalor‘newer’view),sincethecorporationisa
separate‘person’fromtheholders,thedividendwouldbeconsideredincometothe
recipients.Theincomeofthecompanydoesnotbelongtotheholdersbuttothe
company.Therefore,sincethedividendcomesoutofretainedincome,theholders
arereceivingsomethingtheydidnothavebefore.Theissuanceofdividendsisone
entitytransferringsomethingofvaluetootherentities(shareholders).
(c)Thecommanderisastewardwhohasbeenentrustedwiththefundsofthe
companyandgiventherighttooperatethecompany.Theissuanceofadividendis
duetohisorherinfluenceanddecision.Butwhohasgiventhecommander
authority?
Thecommanderactsonbehalfoftheentity,nottheshareholders.Thus,thetheory
assumes thatthe commanderreceives authority from the entity.Because
shareholdersdonothaveeconomiccontrolovertheresourcesofthecompany,the
theoryimpliesthattheydonothavemuchpowerinthecompany.Thetheoryalso
impliesthatthecompanyontheonehandandtheholdersontheother,aredistinct,
separateentities.Ifso,thendividendsareincometotheshareholders,because
theyarereceivingsomethingthattheyhadnocontroloverbefore.
(d)Thefundtheoryseesthefirm asanimpersonalfund.Owners’equityisthe
restrictionontheassets.Inthissense,shareholdersdonothaveanyclaimsonthe
assets;theiramountinthecompanyisviewedasasum thatthecompanymay
havetopayinthefuture.Adividenddoesnotchangethesum thatis‘owing’tothe
shareholders;itsimplyshiftsanamountfrom oneholder’saccounttoanother.It
wouldseem thatunderthefundtheory,dividendsarejustmore‘piecesofpaper’to
representthesameamountofrestrictionontheassets.Thus,dividendsarenot
incometotherecipients.
(e)Theinvestortheoryisanextensionoftheentitytheory,exceptthataccountability
toshareholdersisemphasised.The‘separation’ofthefirm from holdersistaken
forgranted.Similartotheentitytheory,dividendswouldbeconsideredincometo
shareholders,becausetheyarereceivingsomethingtheydidnot‘own’before.
(f)Theenterprisetheoryseesshareholdersasonegroupofparticipantstohelp
generate income from the enterprise.In particularthey provide funds,and
dividendsarethecompensationtoshareholdersfortheircontribution.Dividends
constitutetheirshareofthetotalvalue-addedincome.Sincedividendsreduce
retained earnings(regarded asadistribution ofincometo theenterprisefor
expansionpurposesthatbenefitallparticipants),theywouldbeconsidereda
distributiontoshareholders.Thus,dividendsareincometotherecipients.

10. 11.Thepointofviewadvocateddependsontheparticularuser:theowner,manager,
investorandprovideroffunds.Whichperspectiveshouldtakepreference?
Thisisanopinionquestion.Conventionaltheoryoptsfortheentitytheory.TheFASB
andtheAARF appeartoacceptthisview,butwiththeinclusionoftheentity’s
responsibilityforreportinginformationtousers,mainlyshareholdersandcreditors,
whichistheinvestortheory’semphasis.
12.Ifanentitytheoryviewpointistaken,whichofthefollowingdoyoubelieveis
appropriateindeterminingprofit:
(a)financialcapitalorphysicalcapital?
(b)historicalcostorcurrentcost?
(c)nominaldollarsorconstantdollars?
(a)Financialorphysicalcapital
Whatiscapitalintheentitytheory?Theright-handsideoftheaccountingequation
isequities.Thiscanbedividedbetweenspecificequities(liabilities)andresidual
equity(shareholders’equity).Thetraditionalviewoftheentitytheoryemphasises
accountabilitytoequityholdersforthefundsprovidedbythem.Thisrelatestothe
investmentoftheequityholders,andthereforeafinancialcapitalviewisimplied.
Thenewerinterpretationoftheentitytheorywoulddefinitelytakeaphysicalcapital
approach,becausetheentityisseenasconcernedaboutitself.Thus,theentity
wouldnaturallybeconcernedaboutitsoperatingcapability.Infact,theaccounting
equation,Assets=Equities,fitswellwiththephysicalcapitalviewbecauseowners’
equityisnotrecogniseddirectly.Thefocusisonassets,andthephysicalcapital
viewisconcernedaboutassets,oftheentity’sproductiveandoperatingcapability.
(b)Historicalcostorcurrentcosts
Underthetraditionalentitytheory,anyofthealternativeswouldfitin.However,it
hasbeenarguedthatsinceequityholdersaremainlyconcernedabouttheamount
oftheirinvestment,thenhistoricalcostisthelogicalchoice.Thisisso,becausethe
useofthefundsprovidedbytheequityholdersisinvestedinassets,andfornon-
monetaryassetstheamountoftheinvestmentisthepurchaseprice— the
historicalcost.Thisistheargumentinconventionalaccounting.Butwhether
equityholdersareonlyinterestedintheoriginalamountoftheirinvestmentis
debatable.Manybelievetheyarealsointerestedinchangesinvalue.
Underthenewerentitytheory,followingalongthephysicalcapitalalternative,then
currentcostisthelogicalchoice.Forphysicalcapital,thequestionattheendofthe
periodis:How muchdoestheentityneedinordertomaintainitsoperating
capability?.Theamountneededattheendoftheperiodistheamounttopurchase
theassets,whichiscurrentcost.
(c)Nominalorconstantdollars
Underboth views ofthe entity theory,neitheris favoured.Constantdollar
accountingattemptstocorrectamathematicalproblem,ofdollarsofdifferent
purchasingpowerbeingaddedtogether.Mathematically,numbersmustbeofthe

11. samedomain(samequalityorunitofmeasurement)tobeadditive.Ifsucha
correctionisdesired,thenageneralpriceindexthatispertinenttotheentity’s
circumstancesshouldbeselected.
13.Whatis deprivalvalue accounting? On whatbasis are non-currentassets
measured?Whywouldusersoffinancialreportsconsiderdeprivalvaluesuseful?
Underthedeprivalvalueconcept,assetsarevaluedatanamountthatrepresentsthe
lossthatmightbeexpectedtobeincurredbyanentityifthatentityweredeprivedof
theservicepotentialorfutureeconomicbenefitsofthoseassetsatthereportingdate.
Thusthevaluetotheentityinmostcaseswillbemeasuredbythereplacementcostof
theservicesorbenefitscurrentlyembodiedintheasset,giventhatdeprivalvaluewill
normallyrepresentthecostavoidedasaresultofcontrollingtheassetandthatthe
replacementcostrepresentstheamountofcashnecessarytoobtainanequivalentor
identicalasset.Inthecasewhereitisexpectedthattheassetwillnotbereplaced,the
assetshouldbevaluedatthenetpresentvalueofthecashflowsexpectedfrom
continueduseandsubsequentdisposaloftheasset.
Deprivalvalueallowsusersoffinancialreportstoconsiderthe‘real’valueofassetsin
use,andhowtherelativeimportanceoftheseassetschangesovertime.
14.Whatisthereportingentityconcept?Whatimpactdoesthereportingentity
concepthave on Australian financialreporting? Explain in the contextof
AASB 1025.
AASB 1025.27definesareportingentityas:
…anentity(includinganeconomicentity)inrespectofwhichitisreasonabletoexpectthe
existenceofusersdependentongeneralpurposefinancialreportsforinformationwhichwill
beusefultothem formakingandevaluatingdecisionsabouttheallocationofscarce
resources,andincludesbutisnotlimitedtothefollowing:
(a) alistedcorporation;
(b) aborrowingcorporation;and
(c) acompanywhichisnotasubsidiaryofaholdingcompanyincorporatedinAustraliaand
which isasubsidiaryofaforeign companywherethatforeign companyhasits
securitieslistedforquotationonastockmarketorthosesecuritiesaretradedona
stockmarket.
Intermsoftheabovedefinition,thekeyfactorindeterminingwhetherareporting
entityexistsornotiswhetherornotthereareusersdependentongeneral-purpose
financialreportsofaparticularentityasabasisformakingandevaluatingdecisions
abouttheallocationofscarceresources.
TheapplicationofAASB 1025meansthatasignificantnumberofentitiesareno
longerrequiredtodisclosefullGAAPstatements.However,intermsofpublished
financialreports,publiclylistedcompanieswillcontinuetoreportunderfullGAAP,so

12. verylittle,ifanything,willchangeforinvestorstradinginsharesinlistedcompanies.
StatementofAccountingConceptSAC1,‘DefinitionoftheReportingEntity’,suggests
severalindicatorsthatmaybeusedindeterminingwhetherareportingentityexists.
Thesefactorsinclude:
 separationofmanagementfromeconomicinterests(paragraph20)
 economicorpoliticalimportance/influence(paragraph21)
 financialcharacteristics(paragraph22).
FurtherguidanceisprovidedinAustralianProfessionalStatementAPS 1,‘Conformity
withAccountingStandardsandUIGConsensusViews’.Accordingtoparagraph16of
APS 1,thefollowingtypesofentitieswillalwaysexhibitthecharacteristicsofreporting
entities:
 companieswhosesecuritiesarepubliclylisted
 listedtrustsandothertrustswhichraisefundsfromthepublic
 government-controlledbusinessundertakings
 federal,stateandterritorialgovernments
 localgovernments.
Conversely,accordingtoparagraph18ofAPS1,thefollowingtypesofentitieswill
oftennotexhibitthecharacteristicsofreportingentitiesand,therefore,wouldgenerally
notberequiredtopreparegeneral-purposefinancialreports:
 exemptproprietarycompanies
 familytrusts
 partnerships
 soletraders
 whollyownedsubsidiariesofAustralianreportingentities.
Theaboveareexamplesonly,andtheclassificationofaparticularentitywilldepend
onthecircumstancessurroundingthatentity.Theclassificationcouldalsochange
overtime.
Whendecidingwhetherareportingentityexists,itisimportanttoconsiderwhether
anyfinancialreportusersareabletocommandthepreparationoffinancialreportsas
andwhenrequestedbythem,ratherthanrelyingonthegeneral-purposefinancial
reportsofanentity.
AASB 1025alsorequirestheapplicationofallexistingAASBaccountingstandardsto
non-reportingentitiesthatpurporttopreparegeneral-purposefinancialreports.A
general-purposefinancialreportisdefinedinAASB 1025.27asafinancialreport
intendedtomeettheinformationneedscommontouserswhoareunabletocommand
thepreparationofreportstailoredsoastospecificallysatisfyalloftheirinformation

13. needs.
Adiagramoutliningthedecisioncriteriaisfoundonp.126.
15.WhyhavegovernmententitiesinAustraliamovedtoaccrualaccounting?What
perspectiveshouldgovernmentdepartmentsandagenciesadopt?
Untiltherecentadoptionoftheaccrualsystemofaccountingbygovernmentagencies,
thecashflow modelwasadoptedandrevolvedaroundanannualbudgetoffunds
available.Thiswasbecauseoftheannualallocationoffundsforbothongoingand
capitalexpenditures.Theshifttoaccrualaccountingwassupportedbytheaccounting
profession,becauseasingleframeworkofaccountingfororganisationscouldbe
adoptedinAustralia.Possiblereasonsforitsintroduction,include:
 tointroduceacorporatemodelofevaluationoftheperformanceofagenciesand
departments
 toallow abaseforvaluationofassetstosupporttheprivatisationofcertain
governmentactivitiesandassetsheld
 toprovideacommonplatformforaccountingeducation
 asapoliticaldevicetobringforwardexpendituresoffutureperiods,largelythrough
capitalisationmethods,inordertosignalcommitmentsbygovernmentsinadefined
politicalcycle.