Accounting Standards and Issues: IFRS Adoption, CSR Regulation, Fair Value vs. Cost Model

In this document we will discuss about Accounting Standards and Issues and below are the summary points of this document:- The report examines accounting standards, including IFRS adoption, CSR regulation, and fair value vs. cost model. Part D analyzes impairment testing and fair value accounting by Wesfarmers Company. Part E addresses the adoption of the New Accounting for Lease proposed by the IASB.

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ACCOUNTING THEORY AND PRACTICE
Student’s Name:
Institution Affiliation:

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Executive Summary
The report examines the accounting standards and principles which guide firms in addressing the
current Issues. Some of the accounting issues under consideration are impairment testing, asset,
and liability revaluation, and the adoption of IFRS standards in the U.S. The report is divided
into five parts. Part A addresses the IFRS Adoption in the U.S. Part B examines the application
of nonspecific regulation on CSR in Australia. Part C is divided into three subsections which
compare Fair Value and Cost model accounting standards. Part D analyze the application of
impairment testing and fair value accounting by Wesfarmers Company, an ASX listed company.
Part E addresses the adoption and acceptance of the New Accounting for Lease as proposed by
the IASB.
Table of Contents

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Introduction.................................................................................................................................................4
Part A: IFRS Adoption in the U.S...............................................................................................................4
Qualitative characteristics of financial reporting.....................................................................................4
IFRS on financial disclosure....................................................................................................................5
Task Part B: Nonspecific regulation on CSR...............................................................................................5
(a) Public Interest Theory..................................................................................................................6
(b) Capture Theory............................................................................................................................6
(c) Economic Interest Group Theory of regulation............................................................................6
Part C: Fair Value vs Cost model................................................................................................................7
(a) The motivating factor for directors not to revalue the property, plant, and equipment.................7
(b) The effects the decision not to revalue PPE on the firm’s financial statements...........................7
(c) The impact of the decision not to revalue PPE on shareholders’ wealth......................................8
PART D: Wesfarmers Company.................................................................................................................8
(i) Asset/s that were tested for impairment...........................................................................................8
(ii) Procedure to conduct impairment testing.....................................................................................9
(iii) Impairment expenditures during the period.................................................................................9
(iv) The key estimates and assumptions used to conduct the impairment testing.............................10
(v) Presence of subjectivity that would influence the outcome of the impairment testing...............10
(vi) Difficulties to understand about the impairment testing.............................................................10
(vii) Insightful gained about conduct impairment testing......................................................................11
(viii) Based on your assignment, comment on the “fair value measurement”........................................11
PART E: New Accounting for Leases.......................................................................................................11
i. IASB chairperson’s comment on new accounting for lease...........................................................11
ii. Higher balance sheet lease liabilities compared to the debt under the former accounting for lease
accounting.............................................................................................................................................12
iii. Former accounting standard for leases offered ‘no level playing field’ between some airlines
companies..............................................................................................................................................12
iv. Chairperson’s view on the unpopularity of the new accounting for leases.................................12
v. Reasons why the chairperson believes the new visibility of all leases will lead to better-informed
investment decisions by investors and the management........................................................................13
Conclusion.................................................................................................................................................13
References List..........................................................................................................................................14

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Introduction
This report provides conclusive analysis of some inherent changes in the accounting frameworks
as a function of recent changes brought about by the IFRS standards. The research also
demonstrates the response of the various industry stakeholders to the changes in accounting
standards including the government. More specifically the analysis covers the effect of such
changes on the account standards such as revaluation, impairment, and leases for various assets
within companies and the subsequent treatment of these changes in financial statements.
Part A: IFRS Adoption in the U.S.
Qualitative characteristics of financial reporting
Confidentiality has been a guiding principle in financial reporting however the adoption of IFRS
would go against this principle. IFRS states that companies must publically publish their
financial statements for the stakeholders to scrutinize. According to a statement published by Lin
(2017), “Millions of dollars have been spent adopting international financial reporting standards
to help investors make like-for-like comparisons between companies in global capital markets.
But CFOs say they are useless and have driven financial disclosures to unmanageable levels”.
According to this statement, although IFRS has been updated to cater for the current reporting
practices, the standard disregards confidentiality of company audited reports. The adoption of
IFRS by the U.S entities would prohibit them from enjoying professionalism and confidentiality
principles under the U.S. GAAP (Brown, 2012, p. 63).

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IFRS on financial disclosure
The IFRS principle on financial disclosure has been adopted globally. The principle requires
companies to disclose specific financial information to achieve financial uniformity in company
reporting (Nobes, 2011, p. 112) (Azmi, 2016, p. 51). A good example is the IFRS 7 which
requires the provision of the important financial instruments and the risks attached to the specific
financial instruments including the nature of such risks (Deloitte, 2019, p. 43) (Beerbaum, 2016).
Likewise, the IFRS 9 provides for the measurement at fair value of financial assets and liabilities
held by a firm for trade or their original value (Beerbaum, 2016, p. 32).
The statement by the former AXA head of finance Geoff Roberts contradicts the importance of
the IFRS adjustments. This statement elaborates on the importance of the financial adjustments
required by IFRS. Investment analysts and fund managers only assume the adjustments because
they are either not aware or not really affected by the adjustments or are completely ignorant.
The IFRS adjustments should be adopted and applied not only by companies but by stakeholders
as well.
The statement by the Wes farmers’ manager indicates that analysts may experience problems
when interpreting the IFRS given the technical nature. Such analysts require subsequent training
which would support acceptance of IFRS. The two statements are inconsistent with the intended
adoption of the IFRS by companies in terms of the technicalities presented.
Task Part B: Nonspecific regulation on CSR
The decision by the Australian government not to introduce specific regulation on CRS can be
explained from the perspective of:

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(a) Public Interest Theory
The public interest theory states that decisions should be to the best interests for the general
public. The public interests theory is inclined toward the preservation of general welfare rather
than the interest that is expressed by well-organized stakeholders (Deegan, 2013, p. 98). Based
on this theory, the government chose not to introduce specific regulations on CSR. The
government decided that the market forces would provide a win-win situation for public
companies and society. The onus is on companies to streamline their operations in line with the
main objectives of social and environmental concerns. Therefore, companies should maintain the
best interests and policies that relate to social and environmental aspects (Lama, 2015, p. 41).
(b) Capture Theory
The capture theory states that the agency relationship that exists between the regulators and the
industry has more benefit for the industry rather than the public interest. The theory holds that
government regulators tend to promote regulations that give more advantage to companies at the
expense of the public. Companies tend to influence the decisions made by government regulators
through financial favors. The effect of such observation is the opposite of intended outcomes
which is to promote the social and environmental responsibilities by companies. Therefore, there
was no need for specific regulations which would not be implemented by the regulatory agencies
(Shimeld, 2017, p. 71).
(c) Economic Interest Group Theory of regulation
The economic interest group theory states that the industry develops its own regulations and
these regulations are aimed at creating equal benefits for the parties concerned. The theory puts
the government on the supply side and the interest groups on the demand side. The government

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supplies the regulation and the interest groups apply them. However, the government uses its
leverage to attain more leverage compared to the interest groups. The advantage of the economic
interest group theory is that the national gains more by regulating the industry while the
disadvantage is that some groups gain more. At the end of the day, the government and the
industry gain more than other specific interest groups. In this case, the Australian government
does not make any social or environmental changes to the Corporations Act because it would
lose the benefits by doing so (Safari, 2017, p. 127).
Part C: Fair Value vs Cost model
(a) The motivating factor for directors not to revalue the property, plant, and equipment
Revaluation of property plant and equipment (PPE) is consistent with the international
accounting standard 16 (IAS 16) (Islam, 2016, p. 201). PPE depreciates over time thus the need
to revalue them in the balance sheet. Revaluation normally reduces the value of PPE because of
the element of depreciation which is treated as an expense in the company financials. Therefore,
the revaluation of PPE attracts a depreciation cost and more taxation when there is a revaluation
surplus recognized in the statement of other comprehensive income. Another factor that
motivates directors to oppose revaluation of PPE is the decrease in the company value or the
market capitalization based on the total net assets (Park, 2016, p. 88).
(b) The effects the decision not to revalue PPE on the firm’s financial statements
Failure to reevaluate PPE has a direct effect on a company’s financial statements. First, the
financial statements shall not represent a true and fair financial position of a company’s value
leading to probable misstatement (Chong, 2009, p. 66). The information would misguide the

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stakeholders and the decision makers who rely on the company’s financials. A company’s failure
to reevaluate PPE can be established during auditing by either forensic analysts or forensic
auditors (Ngwakwe, 2017, p. 59). The findings can be a disappointment to the company’s
shareholders and bring about the subsequent adverse impact on future operations of the
company.
(c) The impact of the decision not to revalue PPE on shareholders’ wealth
The decision to keep the company assets as they are without revaluation shall affect both the
total valuation of the company and its total value of shares. In light of this statement then it
becomes quite likely that shareholders’ wealth can be adversely affected where assets depreciate.
In the case of appreciation of the value of assets such as land, the total value of shareholders’
wealth shall be undervalued (Wolk, et al., 2017, p. 87).
PART D: Wesfarmers Company
The analysis has been prepared based on Wes Farmers’ 2018 financial report.
Within your firm’s latest annual report
(i) Asset/s that were tested for impairment
Testing for impairment for Wesfarmers Group has been addressed under note 17 of the 2018
annual report. The company tested its property, plant and equipment, intangibles and goodwill as
shown in the Impairment of non-financial assets picture below.

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Picture 1: Impairment of non-financial assets
Source: (WesFarmers, 2018, p. 129)
(ii) Procedure to conduct impairment testing
Wesfarmers Inc. calculated the impairment based on an annual percentage test on the specific
PPE assets of the firm and the subsequent recognition of a provision within the financial
statements (WesFarmers, 2018, p. 129). The impairment was also established as a function of
revaluation of the company assets and the figures compared to the initial company figures,
therefore, enabling the determination of the actual impairment costs (Ji, 2013, p. 76). Impairment
was tested and calculated as shown in picture 2 below.
Picture 2: Impairment Calculations procedure
Source: (WesFarmers, 2018, p. 129)

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(iii) Impairment expenditures during the period
Yes, Wesfarmers Inc. has determined that the firm has had impairment expenditures reduce the
net profit after tax significantly which include $92 M impairments relating to write-offs and store
closure provisions as well as 66M relating to the write-down of stock as shown in picture 3
below.
Picture 3: Impairment recognised during the 2018 financial year
Source: (WesFarmers, 2018, p. 129)
(iv) The key estimates and assumptions used to conduct the impairment testing.
The impairments are assumed to relate to the annual depreciation of the PEE held by the firm
and therefore there has been a provision for the impairment charges. The key estimates include
the fair value determination of one of the lines of operations that have been disposed of, which is
Buki. The impairments also include the fair value determination of the value of the firm and the
related goodwill amortization as impairment charges (Nobe, 2015).
(v) Presence of subjectivity that would influence the outcome of the impairment testing.

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No subjectivity was found in the impairment testing process for Wesfarmers Inc. thus no
material influence on the firm.
(vi) Difficulties to understand about the impairment testing
Impairment testing for Wesfarmers Inc. has been combined with the write-offs as well as store
closure provisions as one figure of $99 M. The target impairments for 2018 has been provided as
$300M which has been deducted from the 2018 EBIT amounts pretax. The confusing aspect
however about the impairment realized is that the impairment has not been specified for the
exact asset it relates to rather than the PPE generalization (Wang, 2018, p. 139).
(vii) Insightful gained about conduct impairment testing
First, impairment testing is based on estimates and assumptions that are not necessarily accurate
in terms of the amounts recorded within the financial statements. Second, impairment testing can
be done for the cash and non-cash impairments and combined cash Generating Unit (CGU). And
third, impairment testing is based on the measurement of assets at fair value of assets (Roozen,
2018, p. 119).
(viii) Based on your assignment, comment on the “fair value measurement”.
Fair value measurement is the best approximation or determination of the best possible value for
an asset at the fair market value. The international accounting standards provide the
measurement of assets at the best possible fair value as per the IFRS. IFRS 9 provides for the
measurement of fair value through the profit and loss for the assets held at original costs and
those financial assets that are held for sale. The differences in the valuation of assets at fair value

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over time amount to impairment except for the assets whose value increases with time (Carlin,
2008, p. 42).
PART E: New Accounting for Leases
i. IASB chairperson’s comment on new accounting for lease
The chairperson of the IASB was of the view that the former accounting standard of leases did
not reflect the actual economic reality as it was majorly based on finance leases recognition
rather than all leases thus concealing material liabilities in company financials (Lin, 2017, p. 21).
ii. Higher balance sheet lease liabilities compared to the debt under the former accounting for
lease accounting
This observation was because of the long term debt obligation represented by the operating
leases and the widespread number of leases that were taken up by firms due to the ability of non-
disclosure in the balance sheet thus the accumulation of debt obligations by firms (Nobe, 2015,
p. 90).
iii. Former accounting standard for leases offered ‘no level playing field’ between some airlines
companies
Some airline companies lease all their fleet thus accumulating long term debt obligations which
are intentionally left out from being reported in the balance sheet. Other airlines acquire all their
fleet by purchase thus incurring actual costs and actual ownership of fleets. The performance of
such companies could not be compared on similar scope given the treatment of leases under the
old accounting standard (Ram, 2013, p. 37).

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iv. Chairperson’s view on the unpopularity of the new accounting for leases
The unpopularity would arise from the impact of the new accounting standard on the leasing
industry. Business is likely to decrease in the number of leases subscribed to by companies.
Likewise, the unpopularity shall arise from the increased exposure of companies in light of the
long term debt obligations realized and the exposure to shareholders and investors of the true
companies’ position (Vergauwe, 2013, p. 51).
v. Reasons why the chairperson believes the new visibility of all leases will lead to better-
informed investment decisions by investors and the management
The main point illustrated in the statement above is the recognition of the risk elements within
the company financials that shall be attached to the firm assets by the debt level. The higher the
gearing ratio, the riskier it is for a firm and the less preferable it is for investors to put in an effort
to acquire a shareholding in the company. Therefore, given the representation of the true position
of firms based on the effect of IFRS 16 on leases shall result to informed, more realistic
investments thus more appropriate decision making by investors (Ram, 2013, p. 33).
Conclusion
The report provides an analysis of different accounting aspects in light of the emerging trends
and the impact of new accounting standards within the conceptual accounting framework. The
report provides a highlight of the company analysis in light of the treatment of the firms’
accounting aspects which shall be deemed to be consistent with the new accounting standards.
The research basically covers the fair value changes in measurement of assets and the subsequent
impairment, some of the steps by the Australian government and industry with regard to the

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changes in accounting standards for regulation as well as the effects and impacts of the changes
to the accounting policies for leases (Wang, 2018, p. 80).

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References List
Azmi, A. C., 2016. IFRS Disclosure Compliance in Malaysia: Insights from a small sample
analytical study. Australian Accounting Review, pp. 390-414.
Beerbaum, D., 2016. IFRS 9 for the Banking industry. SSRN electric journal.
Beerbaum, D., 2016. IFRS 9 for Financial Institutions. SSRN Electric journal.
The body of Knowledge, 2019. Public interest Theory of Regulation. [Online]
Available at: http://regulationbodyofknowledge.org/glossary/p/public-interest-theory-of-
regulation/
Brown, P., 2012. Ten Years of IFRS: Reflections and Expectations. Australian Accounting
Review, pp. 318-318.
Carlin, T. M., 2008. Goodwill impairment testing under IFRS. SSRN Electronic journal.
China-USA Business Review, 2013. IFRS 7 Risk disclosure policies. China-USA Business
Review.
Chong, G., 2009. Audit independence and objectivity. SSRN Electric journal, pp. 63-78.
Deegan, C., 2013. Financial accounting theory. 4th Edition ed. North Ryde, N.S.W: McGraw-
Hill Education.
Deloitte, 2019. IFRS 7: Financial instruments :disclosures. [Online]
Available at: https://googleweblight.com/i?u==https://www.iasplus.com/en/standards/
ifrs7&hl=en-KE
Islam, M. S., 2016. Revaluation of PPE in Bangladesh. SSRN Electronic Journal.

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Ji, K., 2013. Better late than never, the timing of goodwill impairment testing in Australia.
Australian Accounting Review, pp. 369-379.
Lama, T., 2015. Company characteristics and compliance with ASX corporate governance.
Pacific Accounting Review, 27(3), pp. 373-392.
Lin, S. W., 2017. Relative effects of IFRS Adoption. SSRN Electric Journal.
Ngwakwe, C. C., 2017. QUALITY ASSURANCE AUDIT AND CORPORATE
GOVERNANCE ISSUES IN HIGHER DEGREES.TOWARD A FRAMEWORK FOR
ENHANCED OBJECTIVITY. Corporate Ownership and Control, 14(4), pp. 396-404.
Nobe, C., 2015. IFRS 10 Years on. Accounting Europe, pp. 153-170.
Nobes, C., 2011. IFRS Practices and the persistence of accounting system classification. Abacus,
pp. 267-283.
Park, J. M., 2016. Disclosure impacts of revaluation implementation decision and revaluation
results. Appraisal studies , pp. 1-22.
Ram, R., 2013. IFRS for SMEs. Australian Accounting Review, pp. 3-17.
Roozen, K., 2018. Impact of IFRS 9 and IFRS 15. Maandblad Voor Accountancy en
Bedrijfseconomie, pp. 309-328.
Safari, M., 2017. Board and audit committee effectiveness in the post -ASX Corporate
Governance Principles and Recommendations Era. Managerial Finance, 43(10), pp. 1137-1151.
Shimeld, S., 2017. Diversity ASX corporate governance recommendations: a step towards
change ?. Sustainability Accounting, Management and Policy Journal, 8(3), pp. 335-357.

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Vergauwe, S., 2013. Disclosure comparability. SSRN Electric Journal.
Wang, X. J., 2018. Compliance over time by Australian firms with IFRS adoption. Australian
Accounting Review.
Wesfarmers, 2018. Wes Farmers Annual Report. [Online]
Available at: https://www.wesfarmers.com.au/docs/default-source/reports/wes18-044-2018-
annual-report.pdf?sfvrsn=4
Wolk, H. I., Dodd, J. L. & Rozycki, J. J., 2017. Accounting Theory: Conceptual Issues in a
Political and Economic Environment. 1 ed. London: SAGE Publications.