Accounting Theory and Current Issues Assignment

ACCOUNTING THEORY
& CURRENT ISSUES
ASSIGNMENT

1
By student name
Professor
University
Date: 20 May 2018.
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Executive Summary
We have done an analysis and have drafted a report, for the alternations that have been observed
with the application of the International Accounting Standards and IFRS after 2005. The report
has concentrated on the approach of the International accounting reform in Australia, the
alterations in reporting and accounting, its benefits, the problems being noted by the accountants.
The report reflects that the precision status of the financial statements line items and shareholders
have been at gain. This has been analysed with the annual report of Wesfarmers for the 2 term,
one before 31st Dec 2005 and second one after 31st Dec 2005. The study has been done by using
the article named “Changes in value relevance of accounting information upon IFRS adoption:
Evidence from Australia” issued in Australian Journal of Management by Chalmers, K., Clinch,
G., & Godfrey, J. M.
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CONTENTS:
Introduction...........…………………………………………………………………..........…...4
Analysis.......................………………........................................................................................5
Changes in Accounting Standards................................................................................5
Benefits and disadvantages of adoption of International Accounting Practices…..5
Other aspects and implication………………………………………………………...6
Changes in the annual report of the company……………………………………….6
Conclusion.......................………………...................................................................................10
References......................……………….....................................................................................11
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Introduction
With the launch of IFRS, there has been a great change in the format of reporting and the way a
company is conducting the general accounting. It had an effect on the equity, assets, liabilities
and profit of the units in Australia. The implication of the IFRS was an intricate job which
involved huge disparity among the reporting as per country specific accounting standards and the
IFRS which was applied across world (Bromwich & Scapens, 2016). Australia was amid the first
countries to adopt the IFRS accounting and many businesses got effected due to this. It led to big
modifications in the organisations financial performance and quality of reporting as there were
big variations in AASB and IFRS standards.
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Analysis:
Changes in Accounting Standards
Australia introduced IFRS after 01st January 2005. AASB 132, that was based on financial
instruments: Disclosure and Presentation resulted in a tough definition of the equity and hence
few preference shares and hybrid instruments, earlier classified as equity are now classified as
liabilities (Belton, 2017). According to AASB 139, derivative instruments and hedge accounting,
all the derivative instruments shall be recorded at fair value and recognised in the balance sheet.
Likewise, AASB 139, on financial instruments, recognition and measurement further showed
strict need for the units demanding them to bring back the financial assets such as the mortgages
that have been securitised in the past and have been derecognised from the balance sheet. With
the introduction of IFRS, provisions for impairment has to be reported as per AASB 139 instead
of AASB 1044 noted before (Alexander, 2016).
Advantages and challenges with the selection of International Accounting
practices are mentioned below:
The advantages of IFRS in Australia were:
1. Uniformity in accounting and reporting, and it helps in drawing capital to Australia.
2. Low charges for the preparers and the auditors that results in improving efficiency and
minimizing costs.
3. Maintenance of transparency in accounting and reporting. Disclosures shall help in
quality upgradation of the financial statements ((For example: verifiability, reliability of
the financial statements (Das, 2017)).
The challenges of application of the IFRS in Australia were:
1. Absence of the Australian GAAP procedures and guideline on employee benefit
accounting.
2. Application of new accounting procedure.
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3. The preparers required to be groomed and imparted training which engaged more time,
costs and efforts.
4. Forgoing the comparability of the financial statements (Chron, 2017).
Dissimilarity between the AGAAP and the IFRS are as under:
1. IFRS has wider coverage as compared to AGGAP for the financial instruments,
recognition, measurement and disclosure and the post-employment benefits, this will line
up Australia with the International standards.
2. It is more comprehensive for insurance company accounting, extractive activities and
intangible assets (Félix, 2017).
3. It altered the lookout of accounting in quality with that of earnings management, value
relevance and timely loss recognition.
Other aspects and applications:
With the assumption of International standards, the competition has increased on the global
platform (Dichev, 2017). It omitted barriers to the international capital flows and increased
comparison of the financial reports. It led to upgradation in accounting as there were many
region where the Australian Accounting Standard was not available like IAS 38 and IAS 39 and
those which existed were inessential in terms of end users like AAS 27, 29 and 31 which were
replaced by AASB 1022 and 1023. It led to increase the liabilities, decreasing the equity and
maximum firms had fallen in earnings than the increases (Farmer, 2018). Various studies were
held to have a look, as how International Standards in Australia led to effective accounting
practices and leveraged the global market.
Changes in the annual report of the company
We have taken an example of a company in Australia, the Wesfarmers, that has its headquarter in
Perth. The company trades in New Zealand, Bangladesh, Ireland, United Kingdom and Australia.
It is the largest employer in Australia employing more than 220000 employees, and largest
company in terms of revenue that has a history of greater than 100 years (Kuhn & Morris, 2016).
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Where the financial statements of the years 2005 and 2006 are analysed we find great
dissimilarities. We can refer to the statement of changes in equity separately apart from cash
flow statement, profit and loss account and balance sheet. Earlier it was a part of notes to
accounts in which the reconciliation was stated. -
With the help of this extract, we see that the company has applied AASB standards and
accounting policies for computing the derivative financial instruments and hedging relevant to
the company (Goldmann, 2016). It mentions that the group utilises financial instruments like
forward currency contracts and interest rate swaps for hedging the risks associated with forex
and variations in the interest rate. These derivative financial instruments are computed at the fair
value and in case positive, it is showed as asset and in case of negative, these are identified as
liability in the balance sheet. Any profit or losses in the fair value are directly reported in the
profit and loss account (Kangarluie & Aalizadeh, 2017). For the reason of derivative, accounting
hedges are classified into 3 categories, fair value hedges, the cash flow hedges and the net
investment hedges based on the criteria they fulfil. The company has shown in the disclosures
the accounting policies applicable for these hedges from 30th June 2005.
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Herewith, the company is showing a different disclosure in the significant accounting policies on
which are the considerable rules like assumption and compliance of IFRS. The company has
mentioned that the financial statements have been restated to abide to the comparability for the
adoption of AASB 1023, 139 and 132 (Heminway, 2017). The company has acquired for the 1st
time computation of the financial assets held till end of term, loans and receivables, fair value
measurement and also the derivatives at fair value, hedging gains and losses, etc. The company
has also restored the retained earnings to abide with the newest standards and thereafter it was
practically not possible to show the same in the financial statements, hence the company has
ignored the same.
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As for the impairment of the financial items, the company had adopted AASB 132 and AASB
139, the accounting policies for which have also been stated. It reflects that all the financial
assets would be checked at each balance sheet date for impairment, be it financial assets being
valued at amortized cost or cost or available for sale investments (Sithole, et al., 2017). It states
that the impairment accounting policy will be applicable to both the current and non-current
financial assets. The company made an alteration in the policy for trade payables wherein they
will be recorded at amortised cost according to AASB 132 and AASB 139 going forward from
30th June 2006 whereas in 2005 the same was recorded at cost. Similarly, with regards to the
interest bearing loans and borrowings, the initial recognition will be at fair value less the
transaction and related costs in the beginning from 2006 onwards. In the current case, it is
recognised at the principal value in the financial statements.
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Conclusion
With the adopting of the International Accounting Standards (IAS) by replacing the local GAAP
by Australia, was the best decision in the accounting background as it resulted in parity with the
international reporting and accounting. This has increased the standard of the reporting that was
previously not there in the Australian GAAP and the amendment of those past standards. It has
enhanced the standard, reporting of valuation, the format of financial instruments, the disclosure
requirements, the sustainability and corporate governance accounting. Australia had the benefit
of international financial reporting standards that seems in equivalence with global standards and
leading the Australian economy towards the foreign investments and capital, marking its
contribution in the economy. It increased the profitability of the investors and stakeholders, and
served them useful information that meets the qualitative attributes of financial statements in a
better manner than the previous standards.
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Bibliography
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Kuhn, J. & Morris, B., 2016. IT internal control weaknesses and the market value of firms. Journal of
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