Contemporary Accounting Theory: A Literature Review of Australia and the United Kingdom Regulatory Requirement for Financial Reporting

This report discusses the literature review of Australia and the United Kingdom regulatory requirement for financial reporting. It identifies the problems in the individual countries, discusses the functioning of regulatory environment, and evaluates the financial regulatory environment through the lens of Regulatory Capture Theory. The report also shows the progress of both the countries adoption of IFRS.

Running head: CONTEMPORARY ACCOUNTING THEORY
Contemporary Accounting Theory
Name of Student:
Name of University:
Author’s Note:

1CONTEMPORARY ACCOUNTING THEORY
Executive Summary
The report aims to focused on the literature review of Australia and the United Kingdom
regulatory requirement for financial reporting. The discussions on the “regulatory environment”
has identified the problems in the individual countries. The learnings of the paper have further
discussed on the functioning of these regulatory environment and major decision makers
involved. Some of the other important discussions has included the appropriate legislation. The
next aspect of the study has shown the progress of both the countries adoption of IFRS. The
learnings of the study have been also able to emphasize on the main elements of selected
regulatory environment and evaluate the “financial regulatory environment through the lens of
Regulatory Capture Theory”. The latter part of the discussions has indicated the theories which
might be captured with the regulatory theory in the individual countries. The findings of the
report have revealed several problems in terms of the initial issues had been recognised with
problems such as “lack of training, “problem for the entities, auditors, regulators as well as the
interesting parties who are familiar with previous accounting standards”. In addition to this, in
Australia the small business is seen to be the main victims of the “regulatory capture theory”.
There is a more preference for the large industries, especially the public sectors to be regionally
situated in the major areas across Australia. Some of these regional special interest groups are
seen to be situated in “New South Wales, Victoria and Western Australia”. It is also observed
that in the U.K. “alleged capture of the tax authorities (HMRC) is seen by the UK’s mobile
phone giant, Vodafone, who apparently negotiated a £6b tax reduction, reducing their tax bill for
2009-10 from £7b to £1b”. In addition to this, “Competition Act (1998) and Enterprise Act
(2002)” has seen to be giving the “UK regulators more to act against the abuses of the monopoly
power”.

2CONTEMPORARY ACCOUNTING THEORY
Table of Contents
Introduction......................................................................................................................................3
Part A...............................................................................................................................................3
The perceived problems of each system..........................................................................................3
Working of Regulatory Environment..............................................................................................4
Country’s progress towards the adoption of IFRS..........................................................................5
Part B...............................................................................................................................................6
Regulatory Capture Theory and its usefulness................................................................................6
Characteristics indicating regulatory environment might be “captured”........................................7
Conclusion.......................................................................................................................................8
References......................................................................................................................................10

3CONTEMPORARY ACCOUNTING THEORY
Introduction
As discussed by Ji & Lu (2014), “financial regulations are the laws and rules” which
govern the financial institutions like “banks, brokers and investment companies” can do. The
different types of the rules are promulgated by the “government regulators” to protect the interest
of the investors, promote financial steadiness and maintain orderly market. The various types of
the regulatory activities are seen with setting the minimum standard for “capital, conduct,
making regular inspections, and investigating and prosecuting misconduct”. The key objective of
the financial regulation is often identified with the presenting the data in a comprehensive
manner and ensure that all the firms and the investors are receiving equal opportunity to share
their interests (Hla & Md Isa & A. H. Bin, 2015).
The learnings of the report have focused on the literature review of Australia and the
United Kingdom regulatory requirement for financial reporting. The discussions on the
“regulatory environment” has identified the problems in the individual countries. The study has
also discussed on the functioning of these regulatory environment and major decision makers
involved. Some of the other important discussions has included the appropriate legislation. The
next aspect of the study has shown the progress of both the countries adoption of IFRS. The
learnings of the study have been also able to emphasize on the main elements of selected
regulatory environment and evaluate the “financial regulatory environment through the lens of
Regulatory Capture Theory”. The latter part of the discussions has indicated the theories which
might be captured with the regulatory theory in the individual countries (Christensen et al.,
2015).
Part A
The perceived problems of each system
The main motive for the implementation of IFRS in Australia is identified with
improving the “standards, comparability, accuracy and transparency of financial statements for a
company within a particular period”. Despite of the positive aspects of the IFRS regulation
implementation the initial issues had been recognised with problems such as “lack of training,

4CONTEMPORARY ACCOUNTING THEORY
“problem for the entities, auditors, regulators as well as the interesting parties who are familiar
with previous accounting standards”. In addition to this, there has been significant amount of
issues in adhering to the requirements considered with addition skills for application and
evaluation of IFRS. There have been significant problems with compliance to the political and
legal environment. In some of the other situations he presentation of the information with
uniformity has been seen to be the main factor for the failure of the IFRS implementation
system. It need to be further seen that the understanding of the technical knowledge in various
instances has been considered to be one of the major challenge in the IFRS adoption (Cheung &
Lau, 2016).
In several situations the delays in the new “IFRS Standards” has been seen as the main
challenge at initial stages in the U.K. Some of the various types of the other challenges has been
seen to be based on the slow process of endorsement. It is also observed that “European
Financial Reporting Advisory Group’s (EFRAG)” has been able to identify the early issues in the
adoption of the new standards which were aired in Europe. In “responses to Philippe Maystadt’s
enquiries about IFRS in 2013 on behalf of the Commission”, stated that the Europe as standard
body for modifying the international standard is seen to bring about main problems in
implementing the new standards at later stages. Additionally, the adoption of “IFRS 2 – Share-
based payment” has reduced down by 2.38%” (Deegan, 2014). In addition to this, the IFRS
discontinued several activities held for sale. This is evident with the assets being reduced from
the profit recognition by 0.35%. In several types of the other empirical evidences it has been
identified that adoption of “IFRS on group accounts” has affected the net profit on the “equity of
large listed companies”. In certain situations where there is disposal of subsidiary, the goodwill
was either not taken into consideration for assessment of loss on the disposal calculation or
goodwill amount is not “recycled back into profit” where there involves disposal of subsidiary
(Chen, Ng & Tsang, 2015).
Working of Regulatory Environment
In Australia AASB is recognised as an agency under the “Australian Government”. It is
further observed “AASB standards are known as Australian Accounting Standards” and contain
Australian equivalents to “International Financial Reporting Standards (IFRSs)”. The initial

5CONTEMPORARY ACCOUNTING THEORY
adoption of IFRS had been done by “Australian Accounting Standards, the AASB made some
modifications to IFRSs, including removing some options and adding some disclosures”. The
AASB made certain modifications to the “Australian Accounting Standards” so that the
requirements were identical to the “IFRSs as issued by the IASB for for-profit entities”. The
various types of the other disclosures are seen to e compliant with the additional disclosures
which are seen to be retained and “non-IFRS compliant requirements” applied for the “not-for-
profit and public-sector entities”. The adoption of the new differential reporting by “Australian
Accounting Standards Board (AASB) in July 2010” were selected to adopt the “Reduced
Disclosure Requirements' (RDR)”. These requirements followed the recognition and
measurements standards as per “Australian Accounting Standards (which are equivalent to
IFRSs), but with reduced disclosure requirements” (Cascino & Gassen, 2015).
The net effect of the changes in the company law after the enactment of “EU accounting
directives”, it has been made compulsory to make the relevant adjustments to include the “UK
and Republic of Ireland (ROI) accounting standards” for guaranteeing continued consistency
among the “legal framework and financial reporting”. The various legal framework has provided
the opportunity to consider the most suitable “accounting standards to support the new micro
entities regime”. The several modifications to the company has affected the small company
regimes and minor amendments drafted in lieu of “UK and Republic of Ireland accounting
standards” (Bryce et al., 2015). It has been further considered that the company law distinguishes
that the financial reporting framework namely – “IFRS and UK and Ireland GAAP (generally
accepted accounting practice)”. The public listed entities required to apply IFRS for preparing
the group accounts and the entities are free to choose among “IFRS and UK and Ireland GAAP”
formulating the individual parent accounts. It has been further recognised that UK GAAP
comprised of five regimes and three of which were available in the “FRS 102 The Financial
Reporting Standard applicable in the UK and Republic of Ireland”. It is further identified that
financial relations are mainly considered as per applicable for the “micro entities regime, small
entities regime, FRS 102 and EU adopted FRS” (Cai, Rahman & Courtenay, 2014).

6CONTEMPORARY ACCOUNTING THEORY
Country’s progress towards the adoption of IFRS
The effective date of the implementation of IFRS in Australia is seen to be effective from
“1 January 2005”. On this date AASB began the commencement of adoption and review of the
ongoing relevance of the IFRS with “Australian for-profit and not-for-profit (NFP)” reporting
entities. There have been several cases where the transition process is seen with the
modifications needed for the quality and cost-efficiency of reporting. The IFRS adoption in the
various sectors has allowed the users and preparers to switch between countries and sectors with
adequate skills and knowledge. The different types of the entities which are internationally active
are based on the adoption of IFRSs across the various sectors which has allowed the preparers
and the users to fully comply with the new standard especially with the disclosure requirements
(Krahel & Titera, 2015).
The initiation of the accounting standard in the U.K. was developed by “Accounting
Standards Board (ASB)” from 1 August 1990. It needs to be noted that, on 2 July 2012, “the
FRC Board assumed responsibility for setting accounting standards”. Majority of the accounting
standards were developed by the ASB known as “Financial Reporting Standards (FRSs)”. The
most noted standard is considered with “FRSSE (Financial Reporting Standard for Smaller
Entities). FRSs are first usually issued as Exposure Drafts for consultation that are known as
Financial Reporting Exposure Drafts (FREDs)”. On “November 2012” FRC stated new
standards as a part of the new “UK GAAP framework”. This new framework was initiated as per
“FRS 100: Application of Financial Reporting Requirements” and “FRS 101: Reduced
disclosure framework”. FRC was published the relevant standards for setting out the reporting
requirements as per “FRS 102: The Financial Reporting Standard applicable in the UK and
Republic of Ireland”. In 2014, the new standard as per “FRS 103: Insurance contracts” was first
introduced. In 2015, the new standard as per the “FRS 100, 101, 102 and 103 (known as new UK
GAAP)” were effective from “1 January 2015”. These “FRSs replace existing financial reporting
standards” issued by the “FRC for reporting periods starting on or after 1 January 2015”. In
addition to this, FRC introduced two new standards with “FRS 104: Interim financial reporting”
(issued in March 2015) and “FRS 105: The Financial Reporting Standard applicable to the
micro-entities regime” (Kabir & Rahman, 2016).

7CONTEMPORARY ACCOUNTING THEORY
Part B
Regulatory Capture Theory and its usefulness
The theory of regulatory capture is identified as that form of Government disappointment
which takes place when the “regulatory agency” formed to act in the interest of the public, works
in favour of special interest groups which dominated the industry or sector when regulating
charges are implied. In case the regulatory capture is implemented the “interests of firms or
political groups are prioritized over the interests of the public, leading to a net loss for society”.
“Government agencies” which suffering with the “regulatory capture” are termed as “captured
agencies”. The use of the capture theory is able to identify such agencies where the interests of
firms or political groups are prioritized over the interests of the public (Ijiri, 2018).
The different types of the public interest are seen to be controlled by the industries which
are charged with the captured agencies. The “regulatory capture” has been identified as that
situation when “gamekeeper turns poacher”. In other terms the interest agency sets out to protect
the ignored in favour for the regulatory interest. The “regulatory capture theory” has been
identified with a core focus on the branch of public choice which is referred as the economics of
regulation and economics with a speciality to the “conceptualization of the government
regulatory intervention” (Financial Reporting Council, 2014).
Characteristics indicating regulatory environment might be “captured”
The discussions on the regulatory environment has shown the regulatory capture theory
varies in different countries. In several instances IFRS in Australia is conducive in the
implementing the cost savings policy while preparing the financial reports. It is also seen
organizations have benefitted from complying to the revised exposure drafts and standards.
Some of the changes has been tracked with the agencies which are captured. In Australia the
small business is seen to be the main victims of the “regulatory capture theory”. There is a more
preference for the large industries, especially the public sectors to be regionally situated in the
major areas across Australia. Some of these regional special interest groups are seen to be
situated in “New South Wales, Victoria and Western Australia”. The “small business” sectors are
further able to make significant indirect contribution towards the economy which is often not

8CONTEMPORARY ACCOUNTING THEORY
reflected in the data by the “small businesses’ shares of national employment and output
aggregates” (Christensen et al., 2015).
It has been identified that “Competition Act (1998) and Enterprise Act (2002)” has seen
to be giving the “UK regulators more to act against the abuses of the monopoly power”. Two
examples including the “FSA and the Bank of England” have been perpetual sufferers of
“regulatory capture” by the “banking industry”. It was also accepted by the “Governor of the
Bank of England, Sir Mervin King” that the intricacy and weight of the regulations had made it
more difficult for the regulators to operate (Ali, Akbar & Ormrod, 2016). The second recent
example is seen to be “alleged capture of the tax authorities (HMRC) by the UK’s mobile phone
giant, Vodafone, who apparently negotiated a £6b tax reduction, reducing their tax bill for 2009-
10 from £7b to £1b”. The “immediate five-year period” after the “Enterprise Act (2002)” came
into power not as a single major factor cartel as “investigated by the OFT”. Despite of charging
“heavy fines”, covert collusion is difficult to prove. The new powers have been able to provide
the supervisors to undertake the covert investigation of the firms to found whether collusion may
take place. The tacit collusion is almost impossible to prove, the various types of the statistical
techniques which may be used with the correlations among the proc movement in ‘theory’ and
practice. There have been several instances of “cheating’ or finding loopholes, such as getting
round the regulations by moving into an adjacent market”. There has been a major
disparagement that the single markets are inadequately defined (Bryce et al., 2015).
Conclusion
The main interpretation of the discussions on the perceived problems of Australia has
revealed that despite of the positive aspects of the IFRS regulation implementation the initial
issues had been recognised with problems such as “lack of training, “problem for the entities,
auditors, regulators as well as the interesting parties who are familiar with previous accounting
standards”. The main challenge at initial stages in the U.K. has been seen to be based on the slow
process of endorsement. It is also observed that “European Financial Reporting Advisory
Group’s (EFRAG)” has been able to identify the early issues in the adoption of the new
standards which were aired in Europe. The information on working of regulatory environment in
Australia is considered with observed “AASB standards are known as Australian Accounting

9CONTEMPORARY ACCOUNTING THEORY
Standards” and contain Australian equivalents to “International Financial Reporting Standards
(IFRSs)”.
The initial adoption of IFRS had been done by “Australian Accounting Standards, the
AASB made some modifications to IFRSs, including removing some options and adding some
disclosures”. The adoption of the new differential reporting by “Australian Accounting Standards
Board (AASB) in July 2010” were selected to adopt the “Reduced Disclosure Requirements'
(RDR)”. Information on working of regulatory environment in the U.K. has made it compulsory
to make the relevant amendments to include the “UK and Republic of Ireland (ROI) accounting
standards” for guaranteeing continued consistency among the “legal framework and financial
reporting”. Country’s progress towards the adoption of IFRS adoption has depicted. There have
been several cases where the transition process is seen with the modifications needed for the
quality and cost-efficiency of reporting. The IFRS adoption in the various sectors has allowed
the users and preparers to switch between countries and sectors with adequate skills and
knowledge. In the U.K. the adoption of IFRS was developed by “Accounting Standards Board
(ASB)” from 1 August 1990. It needs to be noted that, on 2 July 2012, “the FRC Board assumed
responsibility for setting accounting standards”.
The regulatory agencies are captured with more preference for the large industries,
especially the public sectors to be regionally situated in the major areas across Australia. Some
of these regional special interest groups are seen to be situated in “New South Wales, Victoria
and Western Australia”. The regulatory capture theory in the U.K. “FSA and the Bank of
England” who have been perpetual sufferers of “regulatory capture” by the banking industry.
This is seen to be evident with “alleged capture of the tax authorities (HMRC) by the UK’s
mobile phone giant, Vodafone, who apparently negotiated a £6b tax reduction, reducing their tax
bill for 2009-10 from £7b to £1b”.

10CONTEMPORARY ACCOUNTING THEORY
References
Ali, A., Akbar, S., & Ormrod, P. (2016). Impact of international financial reporting standards on
the profit and equity of AIM listed companies in the UK. Accounting Forum, 40(1), 45–
62. https://doi.org/10.1016/j.accfor.2015.12.001
Bryce, M., Ali, M. J., & Mather, P. R. (2015). Accounting quality in the pre-/post-IFRS adoption
periods and the impact on audit committee effectiveness - Evidence from Australia.
Pacific Basin Finance Journal, 35, 163–181. https://doi.org/10.1016/j.pacfin.2014.12.002
Bryce, M., Ali, M. J., & Mather, P. R. (2015). Accounting quality in the pre-/post-IFRS adoption
periods and the impact on audit committee effectiveness - Evidence from Australia.
Pacific Basin Finance Journal, 35, 163–181. https://doi.org/10.1016/j.pacfin.2014.12.002
Cai, L., Rahman, A., & Courtenay, S. (2014). The effect of IFRS adoption conditional upon the
level of pre-adoption divergence. International Journal of Accounting, 49(2), 147–178.
https://doi.org/10.1016/j.intacc.2014.04.004
Cascino, S., & Gassen, J. (2015). What drives the comparability effect of mandatory IFRS
adoption? Review of Accounting Studies, 20(1), 242–282. https://doi.org/10.1007/s11142-
014-9296-5
Chen, L., Ng, J., & Tsang, A. (2015). The effect of mandatory IFRS adoption on international
cross-listings. The Accounting Review, 90(4), 1395–1435. https://doi.org/10.2308/accr-
50982
Cheung, E., & Lau, J. (2016). Readability of Notes to the Financial Statements and the Adoption
of IFRS. Australian Accounting Review, 26(2), 162–176.
https://doi.org/10.1111/auar.12087
Christensen, H. B., Lee, E., Walker, M., & Zeng, C. (2015). Incentives or Standards: What
Determines Accounting Quality Changes around IFRS Adoption? European Accounting
Review, 24(1), 31–61. https://doi.org/10.1080/09638180.2015.1009144

11CONTEMPORARY ACCOUNTING THEORY
Christensen, H. B., Lee, E., Walker, M., & Zeng, C. (2015). Incentives or Standards: What
Determines Accounting Quality Changes around IFRS Adoption? European Accounting
Deegan, C., 2014. Financial accounting theory. McGraw-Hill Education Australia.
Financial Reporting Council. (2014). The UK corporate governance code. Financial Reporting
Council, (September), 1–36. https://doi.org/Retrieved from Financial Reporting Council
Hla, D. T., & Md Isa, A. H. Bin. (2015). Globalisation of financial reporting standard of listed
companies in asean two: Malaysia and singapore. International Journal of Business and
Society, 16(1), 95–106.
Ijiri, Y. (2018). An introduction to corporate accounting standards: A review. Accounting,
Economics and Law. https://doi.org/10.1515/ael-2017-0058
Ji, X.-D., & Lu, W. (2014). The value relevance and reliability of intangible assets : Evidence
from Australia before and after adopting IFRS. Asian Review of Accounting, 22(3), 182–
216. https://doi.org/10.1108/ARA-10-2013-0064
Kabir, H., & Rahman, A. (2016). The role of corporate governance in accounting discretion
under IFRS: Goodwill impairment in Australia. Journal of Contemporary Accounting and
Economics, 12(3), 290–308. https://doi.org/10.1016/j.jcae.2016.10.001
Krahel, J. P., & Titera, W. R. (2015). Consequences of big data and formalization on accounting
and auditing standards. Accounting Horizons, 29(2), 409–422.
https://doi.org/10.2308/acch-51065