Corporate Accounting

Solutions for Tutorial 1

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1. Outlines the advantages of incorporation over other forms of organization
A corporation is the most complex form of business and involves the most paperwork and
expenses to set up, but it could offer certain rewards that other forms of business do not
offer.
 Liability Protection
The biggest benefit a corporation offers over other business structures is
liability protection. Compared to partnerships and sole proprietorships, owners
of a corporation are not held responsible for the company debts and legal
responsibilities, and are not subject to lose personal assets if the company goes
bankrupt or is caught up in costly legal situations.
 Access to Funds
A corporation could raise funds easily by issuing stocks or bonds.
 Tax Benefits
Corporations enjoy some tax benefits as corporations have to file taxes
separately from the shareholders.

2. Distinguish between a large and small proprietary company. What are the implications of
being classified as large rather than small?
(Not in Indonesia)
A small proprietary company is defined as one which meets 2 of the following three criteria:
 Consolidated annual revenue less than $25 million.
 Consolidated gross assets at the end of the financial year is less than $12.5
million.
 The companies and the entities it controls have fewer than 50 employees at the
end of the financial year.
If these criteria are not met, the company is considered as a large proprietary company.
Small proprietary companies don’t have to prepare formal financial statements / have them
audited. However, they must keep sufficient accounting records to allow preparation and
audit.
Large proprietary companies must prepare financial reports in accordance with accounting
standards, have them audited, and send them to shareholders.

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 (In Indonesia)
 Minimum Requirement by Company Law
Article 32 of the Company Law sets the minimum amount of authorized capital for
a limited liability company in Indonesia on 50 million rupiah. The same article also
regulates that for certain sectors the minimum amount may be set higher.
 Micro, small, medium and Large Limited Liability Company Types
The SME law further defines article 32 of the company law and splits the limited
liability company up in the following company types:
i. Micro company: a limited liability company will be categorized as micro
company if it has a net capital of minimum 50 million rupiah, excluding
land and buildings, or it has an annual sales turnover of maximum 300
million rupiah.
ii. Small company: a limited liability company will be categorized as small
company if it has a net capital of between 50 million rupiah and 500 million
rupiah or it has an annual sales between 300 million rupiah and 25 billion
rupiah.
iii. Medium company: a limited liability company will be categorized as
medium company if it has a net capital of between 500 million rupiah and
10 billion rupiah or it has an annual sales between 2.5 billion rupiah and 50
billion rupiah.
iv. Large company: a limited liability company will be categorized as large
company if it has a net capital of more than 10 billion rupiah or it has an
annual sales of more than 50 billion rupiah.

3. Does a company have to comply with accounting standards in order to show a “true and
fair view “of its financial affairs? Discuss
True and fair view in auditing means that the financial statements are free from material
misstatements and faithfully represent the financial performance and position of the entity.
Although the expression of true and fair view is not strictly defined in the accounting
literature, we may derive the following general conclusions as to its meaning:

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  True suggests that the financial statements are factually correct and have been
prepared according to applicable reporting framework such as the IFRS and they
don’t contain any material misstatements may mislead the users. Misstatements
may result from material errors or omissions of transactions and balances in the
financial statements.
 Fair implies that the financial statements present the information faithfully without
any element of bias and they reflect the economic substance of transactions rather
than just their legal form.

Application & Importance

4. To which entities do accounting standards apply? Discuss the nature of a reporting entity,
and consider reasons for the concept being replaced by one of public accountability.
(Not in Indonesia)
Accounting Standards apply to general-purpose financial statements / reports of entities
which are “reporting entities” and also to the entities which decide to prepare general-
purpose financial statements even if they aren’t reporting entities.
Definition of a reporting entity: reporting entities are all entities (including entities) in
respect of which it is reasonable to expect the existence of users who rely on the entity’s
general purpose financial report for information that will be useful to them for making and
evaluating decisions about the allocation of scarce resources. There is no definition of a
reporting entity in the IASB’s framework at this stage.
All reporting entities are subject to accounting standards when preparing their general-
purpose financial statements.

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Entities such as small proprietary companies, family trusts, partnerships, sole traders and
wholly owned subsidiaries of Australian reporting entities will normally not be required to
prepare general purpose statements in accordance with accounting standards.
An entity has public accountability if:
a. It has issued (or is in the process of issuing) debt or equity instruments in a public
market.
b. It holds assets in a fiduciary capacity for a broad group of outsiders, such as banks,
insurance companies, securities, broker/dealer, pension (of superannuation) fund,
mutual funds or investment banks.
(In Indonesia)
All entities with no exception since PSAK regulated for legal and business entities in
Indonesia.

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