Accounting Theory & Current Issues : Assignment

ACCOUNTING THEORY
& CURRENT ISSUES
ASSIGNMENT

1
By student name
Professor
University
Date: 25 April 2018.
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Executive Summary
A report has been prepared on the changes that have been brought about by the introduction of
the International Accounting Standards and IFRS post 2005. The report highlights and focuses
on the implication of the International accounting reform in Australia and how it has brought
about the changes in reporting and accounting, what are its benefits of the same and what are the
challenges being posed to the accountants. The report also highlights how the changes have
improved the transparency level of the financial statements and stakeholders have benefitted.
This has been explained using the annual report of the company Wesfarmers for the 2 period,
one before 31st Dec 2005 and another one post 31st Dec 2005. The study has also been done using
one of 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 implications...............................................................................................................6
Changes in the annual report of the company........................................................................................7
Conclusion...................................................................................................................................................9
References.................................................................................................................................................10
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Introduction
The introduction of IFRS have brought about an enormous change in the reporting structure and
how the company is doing the general accounting. It has had an impact on the equity, assets,
liabilities and surplus of the entities in Australia. The implementation of the IFRS was a complex
task which involved significant differences between the reporting as per country specific
accounting standards and the IFRS which was being used worldwide (Bromwich & Scapens,
2016). Australia was one of the first countries to adopt the IFRS accounting and a lot of
businesses got impacted due to this. There were several discussions as it to it would lead to
material changes in the entities financial performance and quality of reporting as there were huge
differences in AASB and IFRS standards. Some of these changes and their impact have been
shown below in the analysis.
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Analysis
Changes in Accounting Standards
IFRS was introduced in Australia post 01st January 2005. AASB 132 which was based on
financial instruments: Presentation and Disclosure introduced a more stringent definition of the
equity and thereby preference shares and various other hybrid instruments which were earlier
classified as equity were now reclassified as liabilities (Belton, 2017). Similarly AASB 139, on
financial instruments, recognition and measurement also laid down stricter requirements for the
companies requiring them to bring back the financial assets like mortgages that had been
securitised in the past and have been derecognised from the balance sheet. Furthermore, as per
AASB 139 on hedge accounting and derivative instruments, all of them will be measured at fair
value and then recognised in the balance sheet. This was a departure for the then treatment of the
derivative instruments which were recognised off balance sheet. Post introduction of IFRS,
provisions for impairment was to be reported as per AASB 139 instead of AASB 1044 which
was being followed before (Alexander, 2016). As per the new rule, impairment provisions will
be recognised on 2 basis namely incurred and incurred but not reported basis meaning it will be
reported as provision only when the loss experience has occurred, if it hasn’t occurred and it is
mere probability, then the provision cannot be recorded against the same.
Benefits and disadvantages of adoption of International Accounting practices
The IFRS changes were applicable for all the entities be it profit making, not for profit, private or
public. Some of the key benefits which were attributable by the adoption of IFRS in Australia are
listed below:
1. Helps in attracting capital to Australia due to uniformity in accounting and reporting as
compared to the rest of the world. Therefore, on totality there would be less cost of
capital.
2. It will result in lower costs for the preparers and the auditors and will result in increasing
efficiency and decreasing the costs. There will be no need to recast the financial
statements every now and then (Bizfluent, 2017).
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3. There will be no anomalies in the financial statements which were present in Australian
GAAP.
4. It will lead to more transparency of the accounting and reporting and the disclosures will
help enhancing the qualitative characteristics of the financial statements like
understandability, verifiability and reliability of the financial statements (Das, 2017).
If there were benefits, there was also some costs and disadvantages of implementing the IFRS
standards in Australia, some of which were:
1. Loss of the Australian GAAP procedures and guideline on the topics like employee
benefit accounting
2. Implementation of new accounting procedure meant that accountants need to be trained
in that regard and there was huge time, costs and effort involved in the same.
3. It compromised with the comparability aspect of the qualitative characteristics of the
financial statements (Chron, 2017).
Main differences between the AGAAP and the IFRS are mentioned below:
1. IFRS is more comprehensive and detailed cum verifiable as compared to AGGAP with
respect to the financial instruments, recognition, measurement and disclosure and the post
employment benefits, this would align Australia with the International standards.
2. It is also more comprehensive in terms of insurance company accounting, extractive
activities and intangible assets (Félix, 2017).
3. It changed the perspective of accounting in terms of quality with respect to earnings
management, value relevance and timely loss recognition.
Other aspects and implications
The adoption of International standards has also brought about a change at the macro-economic
level rather than just the micro economy level. This has increased the competitiveness on the
global front as well as paced up the economy (Dichev, 2017). It has removed barriers to the
international capital flows and increased comparability of the financial reports. The quality of
reporting and the benefits to the stakeholders has increased as they are now aware of the policies
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and procedures better than ever before and are able to take informed decisions. It also brought
about an improvement in accounting as there were many areas where the Australian Accounting
Standard was not available like IAS 38 and IAS 39 and those which existed were redundant and
no more useful in terms of end users like AAS 27, 29 and 31 which were replaced by AASB
1022 and 1023. The main authorities which were responsible for the implementation was
Financial Reporting Council (FRC) and the Australian Accounting Standards Board (AASB). All
in all, if the changes are analysed, it resulted in increasing the liabilities, decreasing the equity
and maximum firms had decrease in earnings than the increases (Farmer, 2018). Various studies
were conducted to check on how the introduction of the International Standards in Australia have
contributed to economy and it was found that the it has brought about effective accounting
practices and leveraged the global market. Accountants are sharing their skills and expertise
across different locations and economies. The chief executive of ACCA also commented that it
has added tangible positive value to the Australian economy and that the consistent and ethical
accounting approach will add to the confidence of the investors and will be crucial for the
companies as well as the country.
Changes in the annual report of the company
Below the example has been given considering one of the pioneer companies in Australia, the
Wesfarmers. It is one of the Australian conglomerate which is headquartered in Perth. The
company deals in Australia, New Zealand, Bangladesh, Ireland and United Kingdom. It is the
largest employer in Australia employing more than 220000 employees. It deals in chemicals,
fertilisers, coal mining and manufacturing industrial and safety products. It is the largest
company in Australia in terms of revenue and has a history of more than 100 years (Kuhn &
Morris, 2016).
In case the financial statements of both the years 2005 and 2006 are being analysed we can find
significant differences in the same. One of these is showing the statement of changes in equity
separately besides cash flow statement, balance sheet and profit and loss account. Previously it
was just being shown as notes to accounts in which the reconciliation was given.
Now the company is having separate disclosure in the significant accounting policies on what are
the major compliances like adoption and compliance of IFRS. The company has also disclosed
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that the financial statements have been restated to ensure comparability for the adoption of
AASB 1023, 139 and 132 (Heminway, 2017). The company has adopted for the 1st time
measurement of the financial assets held till maturity, loans and receivables, fair value
measurement and also the derivatives at fair value, hedging gains and losses, etc. The company
has also reinstated the retained earnings to comply with the latest standards and since it was
practically impossible to reflect the same in the financial statements, therefore the company has
ignored the same.
From the above excerpt of the financial statement, it can also be seen that the company for the
first time has applied AASB standards and accounting policies for the measurement of the
derivative financial instruments and hedging applicable to the company (Goldmann, 2016). It
mentions that the group uses financial instruments like interest rate swaps and forward contracts
for hedging the risks associated with these. IT can be in the form of fluctuations in the interest
rate or forex. These derivative financial instruments are measured at the fair value and if
positive, recognised as asset and in case negative, are recognised as liability in the balance sheet.
Any gains or losses realised in the fair value are directly be reported in the profit and loss
account (Kangarluie & Aalizadeh, 2017). For the purpose of derivative accounting hedges are
being classified into three categories, namely fair value hedges, the cash flow hedges and the net
investment hedges based on the criteria they fulfil. The company has also shown in the
disclosures the accounting policies applicable for these hedges from 30th June 2005.
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 shows that all the financial assets
would be assessed at each balance sheet date for impairment, be it financial assets being carried
at amortized cost or cost or available for sale investments (Sithole, et al., 2017). It also mentions
that the impairment accounting policy would be applicable to both the current as well as the non-
current financial assets. The company has also made a change in the policy for the trade payables
wherein they will be carried at amortised cost as per AASB 132 and AASB 139 going forward
from 30th June 2006 whereas in 2005 the same was being recognised at cost. Similarly for the
interest bearing loans and borrowings, the initial recognition would be at fair value less the
transaction and related costs in the beginning from 2006 onwards. Whereas in the present
scenario, the same is being recognised at the principal value in the financial statements. These
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are few of the major changes that can be seen in the annual report of the company post 2005 as
compared to what was being reported prior to that (Choy, 2018).
Conclusion
From the above analysis and discussion, the findings suggest that the adoption of the
International Accounting Standards and replacing the local GAAP by Australia was one of the
best decisions in its accounting history as it brought them in par with the international reporting
and accounting. This has improved the quality of the reporting in terms of what was previously
not there in the Australian GAAP and the amendment of those standards which were backdated.
Furthermore, it has improved many other aspects of reporting like valuation, the presentation of
the financial instruments, the disclosure requirements and sustainability and corporate
governance accounting. Australia being one of the earliest adopters of the international financial
reporting standards enjoyed the benefits of it like coming in line with global standards and
opening of the Australian economy for the foreign investments and capital thereby contributing
to the economy as a whole. It has also benefitted the investors and the stakeholders community at
large by giving them relevant and reliable information which meets the qualitative characteristics
of the financial statements more comprehensively than the earlier standards. All in all, in case the
implications of the standards in Australia after the IFRS period has to be summarised, it can be
said to be in favour of the accounting profession in Australia.
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References
Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp.
411-431.
Belton, P., 2017. Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat
International ltd.
Bizfluent, 2017. Advantages & Disadvantages of Internal Control. [Online]
Available at: https://bizfluent.com/info-8064250-advantages-disadvantages-internal-control.html
[Accessed 07 december 2017].
Bromwich, M. & Scapens, R., 2016. Management Accounting Research: 25 years on. Management
Accounting Research, Volume 31, pp. 1-9.
Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis.
Ecological Economics, p. 145.
Chron, 2017. five-common-features-internal-control-system-business. [Online]
Available at: http://smallbusiness.chron.com/five-common-features-internal-control-system-business-
430.html
[Accessed 07 december 2017].
Das, P., 2017. Financing Pattern and Utilization of Fixed Assets - A Study. Asian Journal of Social Science
Studies, 2(2), pp. 10-17.
Dichev, I., 2017. On the conceptual foundations of financial reporting. Accounting and Business
Research, 47(6), pp. 617-632.
Farmer, Y., 2018. Ethical Decision Making and Reputation Management in Public Relations. Journal of
Media Ethics, pp. 1-12.
Félix, M., 2017. A study on the expected impact of IFRS 17 on the transparency of financial statements of
insurance companies. MASTER THESIS, pp. 1-69.
Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business.
Financial Environment and Business Development, Volume 4, pp. 103-112.
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Heminway, J., 2017. Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and
Organic Documents. SSRN, pp. 1-35.
Kangarluie, S. & Aalizadeh, A., 2017. 'The expectation gap in auditing. Accounting, 3(1), pp. 19-22.
Kuhn, J. & Morris, B., 2016. IT internal control weaknesses and the market value of firms. Journal of
Enterprise Information Management, 30(6).
Sithole, S., Chandler, P., Abeysekera, I. & Paas, F., 2017. Benefits of guided self-management of attention
on learning accounting. Journal of Educational Psychology, 109(2), p. 220.
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