Advanced Financial Accounting Assignment : IFRS

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Advanced Financial Accounting
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Part A: Criticism on the adoption of IFRS in Australia
Australia decided to replace its accounting standards with the International Accounting
Standards Board (IASB) win 2002 with an aim of enhancing the flow of Australian business
in the global market. However, some Australian accountant and financial experts have
criticised the use of IFRS as captured by Agnes King in her article entitled ‘Unwieldy rules
useless for investors’ (Albu & Albu, 2012, p. 45). According to the critics, IFRS is too
complicated to be understood by investors and can easily mislead their sections making. This
part analyses the criticism against IFRS while seeking to defend the importance of IFRS to
investors and other stakeholders who rely on financial statements for decision making
(Bayerlein & Farooque, 2012, p. 112).
First critics hold that investors do not read the IFRS financial statements simply because they
do not understand the accounting standards. The claim by critics is based on the fact that
analysts and investors never ask questions about the financial statements. However, the IFRS
was prepared by an independent board to provide timely and consistent information to the
investors. The financial statements prepared using IFRS are detailed which is why investors
do not seek explanation from company executives. Good disclosure of information by IFRS
do not require elaborative explanation from investors (Shamrock, 2012, p. 51).
Second, since its adoption in Australia, IFRS has remained relevant and lived true to the
intended purpose. IFRS was adopted to fill several gaps in the Australian Accounting
Standards (AAS) (Shamrock, 2012, p. 76). Some of the gaps in AAS were accounting for the
cost of employer-sponsored superannuation, the recognition and measurement of financial
instruments, impairment of non-financial assets and accounting for share-based payments.
These issues had significant impact on disclosing the true financial position of any company.
Since full adoption of IFRS by Australian companies in 2005, financial statements have

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become richer and comprehensive of information for analysts and investors compared to
before (Opperman, 2009, p. 33).
It is difficult for financial experts and accountant to explain why they are uncomfortable with
IFRS. According to a survey conducted by the PWC found out that investors highly rely on
more regulated financial statements that have been prepared using IFRS for investment
decision making. Instead of not asking questions when financial statements are not clear,
Investors would choose not to invest in the company (Hilton & O’Brien, 2009, p. 181).
Part B: Theories and CSR
This section uses the three theories, that is, (Public Interest Theory, Capture Theory and
Economic Interest Group Theory of regulation to explaining the decision by the Australian
government not to enact legislation that require corporations to engage in Corporate Social
Responsibility (CSR) and let market forces determine the right cause of action for the
companies (Baker, 2005, p. 699).
a) Public Interest Theory and CSR
The Public Interest Theory states that regulations should always seek to benefit and protect
the general public. Public interest theory give the government the responsibility of protecting
the welfare of its citizens. Even a free market where actions taken by business are guided by
the market forces, government reserves the right to intervene when corporations are taking
advantage of the public. Public interest theory hold that the actions taken by companies
should in line with the public interest while focusing on wealth maximisation. Therefore, the
government should take necessary measures in ensuring that corporates take part in CSR
(Baker, 2005, p. 702).

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b) Capture Theory
According to the Capture theory the agencies that are put in place by the government to
protect the rights of the public end up protecting the rights of the industrial players instead. In
other words, the government might introduce regulations which benefit its own interest
instead of benefiting the citizens (Power, 2010, p. 76). For example, the government might
come up with regulations aimed at protecting the environment. With the introduction of such
regulations, companies might be subjected to high fines which end up limiting production. In
such a situation, employees are likely to lose their jobs. On the basis of capture theory of
regulations, allowing the government to introduce new laws would lead to interference with
the operations of companies. On this basis, the government should not be involved in
imposing CSR on companies (Cheong, 2010, p. 133).
c) Economic Interest Group Theory of regulation
This theory states that introduction of regulations governing corporates’ involvement in CSR
activities should be driven by the forces of demand and supply. The government is placed on
the demand side while the corporates are placed in the supply side (Sherry, 2009, p. 59). The
economic Interest group theory of regulation states that both sides should strike a balance and
come up with regulations that support both sides of the equalisation. The regulations
developed by the government should protect the rights of the public while giving companies
an opportunity to operate freely (Arya & Reinstein, 2010, p. 71). In short, economic interest
theory tend to balance between public-interest and self-interest theories.

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Part C: Revaluation and Impairment cost of Non-current assets
Revaluation of non-current assets refers to determining the true value of fixed assets after
taking into account inflation and other changes that might have led to reduction of an asset
price from the acquisition or purchase value. On the other hand, impairment of non-current
assets decreasing the value of an asset when its current value exceeds the book value.
When it comes to revaluation and impairment of fixed assets, the U.S GAAP is a
conservative approach which focuses on increasing profit and reducing the loss for business
owners. On the other hand, IFRS is principle-based which focuses on using balance sheet to
present a fair value of a company (Pozen, 2009, p. 41).
The main purpose of preparing financial information is not only to present important events
but to disclose the most accurate information. Therefore, information must be neutral, free
from error and complete. The issue of the historical value is that is does not take care of the
impact of inflation.
However, avoiding revaluation of fixed assets by the US Financial Accounting Standards
Board is aimed at maintaining the faithfulness of financial information in presenting the true
and fair value of a company. On the other hand, company administrator might use revaluation
models that give them an ability to inflate revenue hence increasing the company financial
value (Beatty, A & Weber, 2006, p. 264).
Yes, FASB Statement No. 144 on Accounting for the Impairment or Disposal of Long-Lived
Assets, allows faithful presentation of a company value.

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Part D: Fixed asset revaluation
(a) What might motivate directors not to revalue the property, plant, and equipment?
There are some reasons why firms choose not to re-evaluate their fixed assets. First, directors
do not want to incur extra cost associated with revaluation. Some of the costs involved in
revaluation of fixed assets include revaluation fees, time consumed in reviewing records, and
figures and the auditors fees. In some countries such as the U.S, revaluation is outlawed
because the financial information generated after revaluation of fixed assets might not be
reliable for decision making (Beatty, A & Weber, 2006, p. 286).
(b) What are some of the effects the decision not to revalue might have on the firm’s
financial statements?
Revaluation of fixed assets has direct impact on the value of fixed assets, shareholders equity
and financial liquidity ratio. Upward revaluation lead to increased value of non-current asset,
increased shareholders’ wealth and reduced liquidity ratios. The decision not to revalue
assets means that there are recorded at their historical cost. Likewise, choosing not to revalue
fixed assets means that companies do not incur extra expenses (Shamrock, 2012, p. 73).
(c) Would the decision not to revalue adversely affect the wealth of the shareholders?
Upward revaluation leads to increased shareholders’ wealth. On the other hand, downward
revaluation leads to decreases shareholders’ wealth. Choosing not to revalue fixed assets
means such assets are valued at their historical cost (Bayerlein & Farooque, 2012, p. 117).
Therefore, a decision not to revalue assets have no direct adverse impact on shareholders’
wealth.

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References List
Albu, N. & Albu, C., 2012. IFRS in an emerging economy: Lessons from Romania.
Australian Accounting Review.
Arya, A. & Reinstein, A., 2010. Recent Developments in Fair Value Accounting. The CPA
Journal..
Baker, C. R., 2005. What is the meaning of ‘the public interest’ Examining the ideology of
the American accounting profession. Accounting, Auditing and Accountability Journal,
Volume 18, pp. 690-703.
Bayerlein, L. & Farooque, O., 2012. Influence of a mandatory IFRS adoption on accounting
practice:Evidence from Australia, Hong Kong and the United Kingdom. sian Review of
Accounting,, 20(2), pp. 93-118.
Beatty, A, A. & Weber, J., 2006. Accounting discretion in fair value estimates: an
examination of SFAS 142 Goodwill impairment. Journal of accounting research, 44(2), pp.
257-288.
Cheong, C. S., 2010. The impact of IFRS on financial analysts' forecast accuracy in the Asia-
Pacific region: The case of Australia, Hong Kong and New Zealand. Pacific Accounting
Review, 22(2), pp. 124-146.
Hilton, A. & O’Brien, P., 2009. Inco Ltd.: Market value, fair value, and management. Journal
of accounting research, 47(1), pp. 179-211.
Opperman, 2009. Accounting Standards. s.l.:Juta and Company Ltd.
Power, M., 2010. Fair Value Accounting, Financial Economics, and the Transformation of
Reliability. Accounting and Business Research, pp. Vol. 40, No. 3.

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Pozen, R. C., 2009. Is It Fair to Blame Fair Value Accounting for the Financial Crisis?, New
York: Harvard Business Review.
Shamrock, S. E., 2012. IFRS and US GAAP: A Comprehensive Comparison. New York:
Wiley.
Sherry, N., 2009. Australian Accounting Standards Amended in Global Action to Address
Impact of Credit Crisis. [Online]
Available at: http://ministers.treasury.gov.au/DisplayDocs.aspx?doc=pressreleases/
2008/067.htm&pageID=003&min=njs&Year=&DocType=