Question

Additional Problem 11 DMA Pty Ltd is a private company with 15 employees, 2 of whom are also the sole directors and shareholders. It has no borrowings apart from a bank loan and has two main suppliers who supply the company with goods on credit terms. Required: (a) What is a reporting entity as defined by SAC1 (b)Would DMA Pty Ltd be a reporting entity? Give reasons for your answer. (c)What are the consequences for DMA if they are a reporting entity?

Answer 1

(a) SAC1 defines a 'Reporting Entity' as an entity in which it is reasonable to expect the existence of users who depend on general-purpose financial statements for information to enable them to make economic decisions.

(b) Guidelines for determining whether an entity is a reporting entity include consideration of :

Degree of separation of management and ownership (economic interest)

Financial Characteristics - no benchmarks provided

Economic or political influence of the entity

Usually this issue is determined by looking at the various user groups and determining their needs and power to access information to fulfill those needs

User	Need	Power	Dependent
Employees(except for 2 directors)	Job security, wages will be paid	No special relationship with management so unlikely to have power	Dependent
Directors/Shareholders	Status of shareholding and performance of company	Likely to have power so have access to necessary information	Not dependent
Bank	Ensure interest payment are made on time and loan will be repaid when due	Likely to have contractual agreement to access required information- including condition in loan agreement	Not dependent
Two main suppliers	Ensure the amounts owed to them are paid on time	As there are only two, likely to have bargaining power. They could withhold supply to DMA if they are refused to access necessary information	Not dependent

Thus, given there are dependent user DMA would be a reporting entity.

(c) The consequences of being a reporting entity is that the entity must prepare GPFRs that comply with accounting standards issued by the AASB/IFRS.