Preparing Financial Reports

Submitted by sylvia.wong@up… on Sun, 12/06/2020 - 02:16

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Financial reports provide a snapshot of a business's financial health at any given point in time. Usually generated at the end of specific reporting periods they provide insight into assets, depreciation, revenue, liabilities, and cash-flow. There are also reports which help with reconciliation and error checking.

Various stakeholders will utilise financial reports for different reasons:

Owners require reports so they can determine cashflow and pay expenses.
Investors require reports to help determine if a business is worthy of them investing in.
Banks require reports to determine the credit worthiness of a business.
Certain government departments such as the Australian Taxation Office (ATO) requires reports for legislative or regulatory purposes.

Accountants deal with confidential financial details of individuals and businesses or organisations. They have the ability and control in recording financial transactions or in manipulating these records for whoever may gain from it. This is why an established code of ethics governs this profession.

Each profession has its own ethical codes which state the fundamental principles professionals should abide by to improve their professional behaviour; maintain public trust and confidentiality; demonstrate integrity, objectivity, and fairness.

One of the key traits of an accountant is adherence to ethical guidelines which also includes strict compliance to guidelines, laws and regulations that govern their area and field of work. Particular to this field are the key provisions of relevant legislation, regulations, standards, and Code of Practice that may affect the preparation of financial reports.

Some of the relevant legislation (Acts) that are applicable when preparing financial reports are:

The Tax Agents Services Act 2009

Organisations registered for Goods and Services Tax (GST) and/or registered as an employer must report their GST amounts and employee PAYG deductions to the Australian Taxation Office (ATO) on the organisation’s Business Activity Statement (BAS).

When a contract bookkeeper provides services relating to the BAS for a fee or rewards the Tax Agent Services Act 2009 (TASA 2009) requires the bookkeeper to be registered with the Tax Practitioners Board (TPB). In additions to the registration of tax agents, the TPB is also responsible for ensuring compliance with other sections of the Tax Agent Services Act 2009 (Cth) (TASA) as well as the Code of Professional Conduct (see ethical principles and practices below).

BAS services include the calculation of BAS liabilities, entitlements and obligations and representing an organisation for its BAS activities with the ATO. If a bookkeeper is not registered a penalty may be imposed under the civil penalty provisions of the TASA 2009. In addition, contract bookkeepers are required under the provisions of the TASA 2009 to hold professional indemnity insurance.

To view or download a copy of this legislation click here.

A New Tax System (Goods and Services Tax) Act 1999

Organisations with a turnover of $75 000 or more, or not-for-profit organisations with a minimum turnover of $150 000, must register for the Goods and Services Tax (GST) and apply a 10% tax to goods and services deemed ‘taxable supply’.

The tax collected must be reported and remitted to the ATO by the due dates stipulated in the legislation. When an organisation incurs GST on its acquisitions it is able to claim the GST paid as a tax credit, thereby reducing the amount it owes to the ATO.

As bookkeepers are an integral part of the recording function in the accounting system, it is imperative they apply GST to transactions in accordance with the regulations and that they keep up to date with changes in GST legislation. The ATO informs registered organisations of changes to the legislation. In addition, the bookkeeper is able to access up-to-date information relating to the GST by searching for ‘GST’ on the ATO website.

To view or download a copy of this legislation click here.

A New Tax System (Pay As You Go) Act 1999

Under the Pay As You Go (PAYG) system, employers are required to withhold income tax from wages, salaries and payments to employees, directors and others and must forward the tax withheld to the ATO.

In addition, employers must issue employees with a pay advice for each payment, issue payment summaries to employees and report to the ATO on withholding payments deducted during the financial year. In some organisations, the bookkeeper is responsible for administering the payroll system and as a result he or she must be aware of the employer’s responsibilities under the PAYG system and relevant compliance requirements.

To view or download a copy of this legislation click here.

Superannuation Guarantee (Administration) Act 1992

The Superannuation Guarantee (Administration) Act 1992 established compulsory employment based superannuation under which employers are required to provide a minimum level of superannuation support for employees who meet certain employment conditions.

This is referred to as the Superannuation Guarantee. Employers are currently required to contribute 9.5% of earnings towards an employee’s chosen superannuation fund. As a result of this legislation, bookkeepers responsible for maintaining an organisation’s payroll system will need to comply with the recording, disclosure, and reporting provisions of the Act.

To view or download a copy of this legislation click here.

Fringe Benefits Tax Assessment Act

Fringe Benefits Tax (FBT) distinguishes the tax payable by employers on benefits provided to employees or associates of employees, in respect of the employee's employment. The definition of an employee includes former, current, and future employees. This tax is also applied to benefits provided by an associate of an employer or by a third party under an arrangement with the employer.

The definition of a fringe benefit specifically excludes, amongst other things, the following:

Payment of salary or wages
The provision of exempt benefits
Payment of superannuation to a complying fund for an employee
An employment termination payment.

Liability for FBT is assessed on an annual basis, with the FBT year beginning 1 April and ending 31 March. The rate of tax may vary from year to year. The current rate of FBT is 47% (equivalent to the top individual marginal tax rate plus the Medicare levy) of the aggregate of the grossed-up taxable values of fringe benefits provided by the employer.

For more information about Fringe Benefits, click this link: Fringe Benefits Tax Assessment Act

Income Tax Assessment Act

The Income Tax Assessment Act mandates individuals and companies, and some other entities to pay income tax. Income tax is to be paid each financial year or income year which is computed as Income Tax = (Taxable Income x Rate) - Tax offsets.

The Method Statement for Income or financial year is as follows:

Calculate taxable income for the income year.
Calculate basic income tax liability on taxable income using: a. the income tax rate or rates that applies for the income year. b. any special provisions that applies to work out the liability.
Calculate tax offsets for the income year. Tax offset reduces the amount of income tax to be paid.
Subtract tax offsets from the basic income tax liability. The result would be the income tax that should be paid for the income year or financial year.

Some entities may work out some or all of their income tax for the financial year by referencing to something other than their taxable income for the income year.

Here is the Australian income tax rates for 2020/21 (Residents)

Income Thresholds	Rate	Tax Payable on this Income
$0 – $18,200	0%	Nil
$18,201 – $45,000	19%	19c for each $1 over $18,200
$45,001 – $120,000	32.5%	$5,092 plus 32.5c for each $1 over $45,000
$120,001 – $180,000	37%	$29,467 plus 37c for each $1 over $120,000
$180,001 and over	45%	$51,667 plus 45c for each $1 over $180,000

To know more information on Income Tax Assessment, click this link: Income Tax Assessment Act

To know more information on Income Tax Rates, click this link: Income Ta x Rates

Taxation Administration Act

The Taxation Administration Act provides general provision in relation to the administration and enforcement of the other tax laws which includes the imposition of tax and its payment; exceptions to and exemptions from liability to the tax; and entitlements to refunds.

Under general provisions, the Taxation Administration Act includes the following:

(a) The assessment and reassessment of tax liability; and

(b) Payment of tax, if this is not provided for in the tax law concerned; and

(d) The imposition of interest and penalty tax; and

(e) Approval of special tax return arrangements; and

(f) The collection of tax; and

(g) Record keeping obligations of taxpayers and general offences; and

(h) Tax officers and their investigative powers and secrecy obligations; and

(i) Objections and appeals; and

(j) Cooperation with other jurisdictions in conducting investigations and enforcing tax laws; and (k) miscellaneous matters, for example, the service of documents, corporate criminal liability and evidence.

This Act also includes general provisions in relation to revenue measures for the purpose of providing an economic response to a COVID-19 emergency.

For more information on Taxation Administration, click this link: Taxation Administration Act

Privacy Act 1988

This Act promotes and protects the privacy of individuals and also regulates how Australian Government agencies and organisations with an annual turnover of more than $3 million handle personal information. Personal Information is defined as any information or opinion that identifies an individual. This includes information that could be reasonably used to identify someone, such as:

Names.
Birth dates.
Addresses.
Telephone numbers.
Medical history.
Family details.

To view or download a copy of the Privacy Act 1988 click here.

Businesses are also subject to the obligations identified in the Australian Privacy Principles or APPs. The APPs are generally applicable to entities that hold personal information. Those businesses covered by the Privacy Act 1988 are subject to the obligations set in APPs.

The thirteen (13) Australian Privacy Principles (APPs) set out the ways how private sector organisations should collect, use, secure and disclose personal information and they are as follows:

Open and transparent management of personal information.
Anonymity and pseudonymity.
Collection of solicited personal information.
Dealing with unsolicited personal information.
Notification of the collection of personal information.
Use and disclosure of personal information.
Direct marketing.
Cross-border disclosure of personal information.
Adoption, use or disclosure of government related identifiers.
Quality of personal information.
Security of personal information.
Access to personal information.
Correction of personal information.

Bookkeepers and BAS agents must take note to collect and use the personal information of customers only for relevant purposes, and ensure that any information regarding private details should not be disclosed to any third party without permission. They should also have policies in place for the proper management of personal information, to restrict access to any records containing client information, and the verification of the accuracy of personal information.

Accountants and Bookkeepers are also governed by certain regulations and regulatory bodies. For example, an accounting standard is a technical pronouncement that sets out the required accounting for particular types of transactions and events. The accounting requirements affect the preparation and presentation of an entity’s financial statements.

The Australian Accounting Standards Board (AASB)is responsible for the setting of accounting standards in Australia. The accounting standards apply to all entities regulated by the Corporations Act 2001. This includes public companies and large proprietary companies formed under corporations’ law, as well as managed investment schemes such as unit trusts.

This Act also ensures that the AASB standards have the force of law, for example:

A company’s directors must ensure that its financial statements comply with accounting standards.
Auditors of companies are required to state whether the accounts have been made out in accordance with accounting standards.
Substantial penalties apply to company directors for non-compliance with the law.

Consequently, a bookkeeper who is employed by an organisation that falls within the definitions of Australian corporations’ law will need to ensure that the organisation’s financial affairs are accounted for in accordance with the requirements and standards of the AASB. The AASB website assists bookkeepers to maintain their knowledge of the Australian accounting standards and their developments.

In addition to legislation and regulations, there are also industry best practice guidelines known as codes of conduct. Some of these codes are considered mandatory (ie. accountants and bookkeepers must be registered with the relevant industry association and agree to abide by their code of conduct) and others are voluntary.

Accountants and Bookkeepers need to be aware of and generally adhere to the Industry Codes of Practice in line with their profession. There are two classifications of codes of practice:

Mandatory Codes

The codes of practice provide a minimum standard of protection to consumers. They are prescribed as regulations under fair trading laws and can be enforced. They are regulated under Government departments, agencies, and/or national bodies. Examples of these types of organisations include the Australian Competition & Consumer Commission (ACCC) and the Tax Practitioners Board.

The Tax Practitioners Board has various Codes of Conduct that affect Accounting and Bookkeeping Industry personnel who providing tax advice and/or services.

The Tax Practitioners Board policy on Continuing Professional Education (CPE) outlines the requirements on how registered members can meet their requirements related to professional development. This includes maintaining a record of evidence of the CPE that all registered Tax and BAS agents have completed.

Other mandatory codes of practice are in place for the following industries or services, these are governed by the ACCC and may impact on Accountants and Bookkeepers who are working for organisations within these industries:

Voluntary Codes

A form of industry self-regulation. They are usually sponsored by an industry association.

For example, an industry association may stipulate that to become a member of their organisation individuals must agree to follow their code of practice). Voluntary industry codes are usually flexible and can be altered quickly in response to changing industry/consumer needs.

CPA Australia is an example of an Industry Association that recognises and expects members to abide by a Voluntary Code. Known as the Code of Ethics for Professional Accountants it is issued by the Accounting Professional and Ethics Standards Board (APESB). This board is an independent national body that sets the code of ethics and professional standards with which accounting professionals who are members of Certified Practising Accountants Australia (CPA Australia), Chartered Accountants Australia and New Zealand (CA ANZ), and Institute of Public Accountants (IPA) must comply.

This code sets out fundamental principles of ethics for Members, reflecting the profession’s recognition of its public interest responsibility. These principles establish the standard of behaviour expected of a Member and can be used as a basis for creating workplace policies and procedures.

The five fundamental principles are:

Integrity - Members are required to be straightforward and honest in all professional and business relationships.
Objectivity - Members must not compromise professional or business judgement because of bias, conflict of interest or undue influence of others.
Professional Competence and Due Care - Members must attain and maintain professional knowledge and skill at the level required to ensure that a client or employing organisation receives competent professional activities, based on current technical and professional standards and relevant legislation; and act diligently and in accordance with applicable technical and professional standards.
Confidentiality - Members must respect the confidentiality of information acquired as a result of professional and business relationships.
Professional Behaviour - Members must comply with relevant laws and regulations and avoid any conduct that the Member knows or should know might discredit the profession.

There is a broad range of sanctions that the Accounting Professional and Ethics Standards Board (APESB) may impose for non-compliance with the Code, ranging from issuing a written caution or an order to undergo training or work under supervision, through to termination of registration. They may also make an application to the Federal Court of Australia for a civil penalty order if any of their members are in breach of the mandatory codes of conduct as stipulated above (ie. Tax Agents, BAS Agents).

Other Voluntary Codes of Practice

An example of a Code of Practice that exists in a similar industry is The Code of Banking Practice by the Australian Bankers’ Association sets out the obligations and best practices that banks must adhere to when dealing with customers.

Every business, no matter how small or large it is, requires accounting and finance policies and procedures to create a strong management foundation.

Policies - Statements that outline the principles and views of a business on each topic covered. Policies provide an overview of certain rules that you have in your business.
Procedures - Provide clear and concise instructions on how to abide by the policy and detail the sequence of activities that are required to complete tasks.

The following must be considered when developing financial administration policies and procedures for an organisation:

Asset purchasing - This policy provides guidelines for the purchase of goods, services, equipment and assets for the business.
Authorising financial transactions - All finance transactions as noted in this policy are to be authorised by the noted authorised person prior to the transaction being undertaken. This includes payment of invoices, business credit card balances, movement of money between accounts, purchasing equipment and stock etc.
Authorising new customers - All new customers to the business must be reviewed and accepted in accordance with this policy.
Authorising new suppliers - All new suppliers to the business must be reviewed and accepted in accordance with this policy to ensure that the supplier service is aligned with the business objectives.
Bank account policy - This policy sets out the requirements for use of bank accounts, including opening, closing authorisation, variations to terms and conditions, reconciliation of bank accounts and bank account transactions.
Budgets - Policies and procedures must be put in place for creating a realistic budget for any business activity. Setting up a realistic budget allows you to predict the financial standing of the business. The following four phases must be part of the policies and procedures for budgeting:
- Budget formulation - This includes a budget forecasting and development policy and processes. This incorporates a commitment to best practices, collaboration with stakeholders, transparency, and accountability.
- Budget approval - Submit the budget to board or stakeholders for approval. If they have objections, either convince them to support the budget or make the requested changes and resubmit.
- Budget execution - Budget execution is the process by which the financial resources made available to an organisation or department are directed and controlled toward achieving the purposes and objects for which budgets were approved. The process involves compliance with both legal and administrative requirements, and adhering to the plan and timings of the budget cycle.
- Budget Review - Have procedures for a regular budget review to see how close actuals are to budget projections. If, say, there's an emergency requiring a cash fix, adjust the budget. If one or more departments is overspending, rein them in or cut spending elsewhere to balance it out.
Business credit card use - This policy provides guidelines for the issue and use of business credit cards.
Customer credit - The customer credit policy is primarily about managing the credit you give a customer and how you monitor their creditworthiness. This policy is to make sure a customer doesn’t get too far into debt with you without a payment plan being put into place or action taken for late payment.
Debt collection - This policy provides guidelines for the collection of late payments from customers to minimise business exposure to debt.
Establishing an accounting system - A cash accrual system or cash-accounting system must be established to allow the business to review and manage their financial activities, and to comply with their financial obligations.
Petty cash - Petty cash should be used to pay for small business expenses up to a set maximum amount, usually up to $100, where payments through accounts payable or business credit card are not justified or appropriate.
Stock management - A stock management policy provides guidelines for purchasing, receiving and maintaining stock. Assists in monitoring and managing the amount of stock within the business to ensure that there are suitable levels of stock available to customers at all times.

Also known as an Accounting Information System (AIS) it is the collection, storage, and processing of financial and accounting data that is used by decision-makers. An AIS is generally a computer-based method for tracking accounting activity in conjunction with information technology resources. The resulting statistical reports can be used internally by management or externally by other interested parties including investors, creditors, and tax authorities.

As a general rule, the retention period is 5 years, however, there are specific situations with different requirements. Refer to the information on the ATO's website for more detail. Records can be maintained in paper or digital format. If copies are made, they must be a true and clear copy of the original. It is highly recommended that a back-up of all digital records is kept.

Documents must be in English unless the expense is incurred outside Australia.

Examples of the types of financial records which must be retained are:

Receipts and other evidence of all sales and purchases.
Tax invoices, wage, and salary records.
GST documents.
Records of the purchase, sale, and other costs of any business assets, such as land, buildings, or office equipment.
All records relating to tax returns, activity statements, fringe benefits tax (FBT) and employee superannuation contributions.

Consequently, all organisations should have a document retention and destruction policy to ensure compliance with various legislative requirements. This policy should:

Identify the types of documents and records to be retained and the required retention period/s.
Determine the method of retention, such as hard copy or electronic copy, ensure a secure method is selected (ie. locked filing cabinets, password protected files).
Detail the file identification protocols (ie. by client surname then first name or initial or by date or by subject matter).
Detail the document destruction methods (ie. shredding of hard copy documents, or permanent deletion of electronic data).

The ATO website provides assistance in the area of records management, for example:

A software program titled: ‘Record keeping evaluation tool’ that assists organisations to identify documents that should be retained.
A document titled ‘Record keeping for small business’.
A document titled ‘Penalties for not keeping or retaining records’.

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