Analysis of Australian Accounting Standards Changes and Exposure Draft of IAS 16

Current Development in Accounting Thought
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Answer 1:
Providing an in-depth understanding to the CEO of my company of a latest accounting
news article for facilitating her to engage in its lively disclosure at an upcoming conference
This section of the report aims to present an analysis of the article entitled ‘Australian
accounting standards in biggest shake-up since 2005’ for examining the theoretical insights of
the paper as per the accounting theory and concepts. The article has mainly discussed about the
impacts of changes introduced in the accounting standards of Australia on the business entities
operating within the country. In this context, the article has mainly emphasized on the issues that
have emerged before the Australian companies in context of implementation of new rules
regarding measurement and recognition of revenue (Poljak, 2018). AASB (Australian
Accounting Standards Board) have directed the business companies operating within the country
to comply with the new revenue standards of AASB 15 for Revenue from Contracts with
Customers. Also, there has been introduction of new standards of AASB 9 for the financial
instruments. AASB 15 has replaced the existing accounting standards of AASB 118 Revenue
and AASB 111 Construction contracts (Accounting News, 2018).
The new accounting standards has required the business entities to measure and recognize
the revenue realized only if it satisfies the performance obligations of a contract. The most
significant change that has brought by the new accounting standards of AASB 15 is to recognize
revenue when it meets the performance conditions as compared to that of AASB 18 that
recognizes the revenue with the use of estimated percentage of completion method. The business
entities as per this standard new to identify each individual contract with customer for
determining its performance obligations. This is followed by calculation and allocation of the
transaction price to each of the performance obligations and recognize revenue on meeting the
obligations specified. As such, the introduction of new standard has caused the increase in
volatility in recognition of revenue. This standard will aim to improve the comparability among
the revenue recognition practices across entities and thus facilitating the decision-making process
of investors from across the world (Impact of Accounting Standard Changes in Recognition of
Revenue, 2017).
The accounting standards of AASB 9 has caused major changes in the ways for financial
reporting of business regarding accounting for financial instruments. The new standard has
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provided a new set of accounting rules for monitoring the financial assets and liabilities and
prescribed new set of hedge accounting rules. The new standard is also expected to have large
implications on impairment of financial assets and is applicable to all entities across various
industries and is not only limited to financial services sector. The major objective of introducing
new hedge accounting rules through introduction of this standards is to depict the risk
management activities of an entity across its financial statement by allowing more hedging
instruments to qualify for hedge accounting (AASB 9 Financial Instruments - Understanding the
Basics, 2017). In addition to this, the article has also discussed about the changes brought by the
new accounting lease standards of AASB 16 in the financial reporting process of Australian
companies. The new lease standards of AASB 16 has directed the business companies to report
majority of their operating leases on the balance sheet from 1 January 2019. The is done for
increasing the transparency in the lease commitments of an entity by recognizing and reporting
he lease in service contract that are not reported under the existing lease standards of AASB 17
on the balance sheet. There will be a large impact on the financial results of an entity as it will
cause significant changes in the recognizing of the properly, equipment and car fleets that are not
recognized under the balance sheet as per the existing accounting lease standard. The accounting
of these financial items will result in accounting for right of use leased assets and liabilities that
will have a major impact on leverage, return on capital and EBITDA outcome of an entity
(Accounting News, 2018).
The new accounting standards are introduced by AASB to comply effectively with IFRS
and to improve the quality of financial reporting across all its business entities. This is essential
to comply with conceptual framework of accounting proposed by IFRS as per which a business
entity need to present the financial information in an understandable, verifiable, comparable and
timely manner. As such, the changes are introduced to enrich the quality of financial information
presented to the stakeholders such as investors, creditors, lenders and borrowers by improving
the transparency and accountability in their business operations. The standard requires the
business entities operating within Australia to disclose additional information about revenue
realized, financial instruments and leases and thereby facilitating the end-users to take accurate
investment decisions. Thus, the adoption of these standards by Australian companies will
improve integrity in their financial statements and make them more comparable in the mind of
foreign investors. This will in turn lead to improved capital inflows from foreign investors
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leading to their sustainable growth by enhancing their international competitiveness (Poljak,
2018).
The need for introduced changes in the Australian Accounting Standards for protecting
the interests of the end-users can also be understood by the application of accounting theories
such as stakeholder and agency theory. The stakeholder theory ahs stated that business entities
need to act in the direction of maximizing the value created for its stakeholders. Thus, all the
decision taken by a business entity should promote the welfare of the stakeholders by protecting
their interests. Also, the agency theory has stated that the major responsibility of an agent, i.e.,
the business managers is to promote the welfare of principal, i.e., the owners. Therefore, it is
necessary for a business manager to adopt such rules and policies that aims to create maximum
return for the shareholders and increases the profit realized by them. Therefore, the introduction
of the new standards of AASB will help the Australian companies to create maximum return and
value for the stakeholders by providing them enhanced financial information to take accurate
decisions (Jones, 2015).
However, as stated in the article the Australian companies are facing larger issues in
successful implementation and adoption of these accounting standards. This requires the business
entities to adopt a new accounting model to improve the comparability of revenue recognition
practices across entities and industries. There will be requirement of introducing new disclosures
and have a large impact on the Key Performance Indicators (KPI’s) and the significant ratios
influencing the share prices of reporting entities. There is also significant requirement of
providing training to the accounting professionals so that they can comply successfully with the
new reporting requirements of AASB (Stebbens, 2018). The business entities also need to cause
large-scale changes in the accounting systems and processes and thereby consuming both money
and time. The implementation journey of the entities to adopt new accounting standard is a
complex process that requires their assessment at initial phase, designing and implementation
phase. This will help Australian companies to successfully adopt the accounting standard
changes through developing a framework that facilitates their easy implementation (Poljak,
2018).
The assessment phase should involve determining the scope of the standards by analyzing
the impact of the introduction of the proposed changes on key accounting judgements and
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