IFRS Adoption and Comparability Challenges

The assignment examines the benefits and complexities associated with transitioning from Generally Accepted Accounting Principles (GAAP) to International Financial Reporting Standards (IFRS). While IFRS aims for global consistency in financial reporting, the text discusses obstacles such as inconsistent implementation of corporate governance, varying auditing quality, and potential lack of expertise in applying IFRS. It also touches on the difficulties posed by transitioning personnel accustomed to GAAP and the challenges of utilizing fair value measurement in markets lacking robust legislation.

Running head: FINANCIAL ACCOUNTING
Financial Accounting
Name of the Student:
Name of the university:
Authors Note:

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Table of Contents
Part A.........................................................................................................................................2
Answer to question i...................................................................................................................2
Answer to question ii.................................................................................................................3
Answer to question iii................................................................................................................4
Answer to question iv.................................................................................................................4
Answer to question v..................................................................................................................5
Part B..........................................................................................................................................5
Answer to Question 1.................................................................................................................5
Answer to Question a.............................................................................................................5
Answer to Question b.............................................................................................................6
Answer to Question c.............................................................................................................7
Answer to Question 2.................................................................................................................8
Answer to question a..............................................................................................................8
Answer to Question b...........................................................................................................11
Reference..................................................................................................................................13

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Part A
Answer to question i
Calculation showing Current Tax Worksheet and Current tax liability for the year
30 June 2017
Particulars Amount ($) Amount ($)
Profit before tax 600,000.00
Add: Expenses disallowed for tax purposes
Depreciation on building 8,000.00
Depreciation on Plant 50,000.00
Entertainment expenses 18,000.00
Bad Debt expenses 60,000.00
Long service leave expense 45,000.00
Annual leave expenses 30,000.00
Rent received 35,000.00
Office supplies 15,000.00
261,000.00
Less: 861,000.00
Rent revenue 30,000.00
Government grant 10,000.00
Tax depreciation 75,000.00
Bad Debt written off 45,000.00
Long service leave and annual service leave 50,000.00
Office supplied paid for 18,000.00
228,000.00
Taxable income 633,000.00

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Current tax liability
Particulars Amount ($)
Taxable income 633,000.00
Tax Rate 30%
Current tax liability @30% 189,900.00
Working calculations:
Allowance for Doubtful debt
Particulars Amount Particulars Amount
Account Receivable $45,000.00 Opening balance $40,000.00
Closing balance $55,000.00 Expenses $60,000.00
Total $100,000.00 Total $100,000.00
Rent Received in Advance
Particulars Amount Particulars Amount
Revenue $30,000.00 Opening balance $20,000.00
Closing balance $25,000.00 Cash $35,000.00
Total $55,000.00 Total $55,000.00
Provision for Employee benefit
Particulars Amount Particulars Amount
Cash $50,000.00 Opening balance $75,000.00
LSL Expenses $45,000.00
Closing balance $100,000.00 A/L Expenses $30,000.00
Total $150,000.00 Total $150,000.00
Answer to question ii
Journal entry
Particulars Debit ($) Credit ($)
Income Tax expenses 189,900.00
Current tax Liability 189,900.00
(Being the current tax liability recorded)

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Answer to question iii
Assets
Cash $80,000.00 $0.00 $80,000.00
Inventory $170,000.00 $170,000.00 $170,000.00
Accounts Receivable $445,000.00 $0.00 $500,000.00 $55,000.00
Office Supplies $25,000.00 $0.00 $0.00 $25,000.00
Plant $240,000.00 $110,000.00 $110,000.00 $130,000.00
Building $152,000.00 $0.00 $0.00 $152,000.00
Goodwill $70,000.00 $0.00 $0.00 $70,000.00
Liability
Accounts Payable $290,000.00 $0.00 $290,000.00
Provision for employee benefits $100,000.00 $100,000.00 $0.00 $100,000.00
Rent received in Advance $25,000.00 $25,000.00 $0.00 $25,000.00
Total Temporary Difference $377,000.00 $180,000.00
Excluded Difference $222,000.00
Temporary Difference for deffered tax $155,000.00 $180,000.00
Deffered Tax Liability (30%) $46,500.00
Deferred Tax Assets (30%) $54,000.00
Beginning Balance $38,100.00 $40,500.00
Adjustments $0.00 $0.00
Increase for the year $8,400.00 $13,500.00
Answer to question iv
Journal entry
Particulars Debit Credit
For 2016
Deferred tax Assets $40,500.00
Deferred tax Liability $38,100.00
Income Tax Expenses $2,400.00
(Being deferred tax recognized)
For 2017
Deferred tax Assets $13,500.00
Deferred tax Liability $8,400.00
Income Tax Expenses $5,100.00
(Being deferred tax recognized)

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Answer to question v
Journal entry to record the current tax liability as on June 30, 2017
Particulars Amount ($) Amount ($)
Income Tax Expenses 221,550.00
Current tax liability 221,550.00
(Being current tax liability recorded)
Deferred tax Assets $15,750.00
Deferred tax Liability $9,800.00
Income Tax Expenses $5,950.00
(Being deferred tax recognized)
Particulars
deferred
Liability deferred tax
Opening Deferred Balance 44,450.00 47,250.00
Current balance 54250 63000
deferred balance 9,800.00 15,750.00
Part B
Answer to Question 1
Answer to Question a.
Materiality has great importance in the context of accounting. The concept of
materiality in accounting can be explained or discussed in various manner. Any such
principle in accounting, which states that every significant or crucial matters or items of the
organization or of the financial statements are to be disclosed to the user of such information
and the unimportant matters can be ignored, is simply according to the concept of Materiality
in accounting (Warren and Jones 2018). On the other hand, the materiality concept is such a
concept that allows an accountant or the user of the data or information to violate any other

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principle of accounting under such circumstances where the amount is so minor that it will
not mislead the reader of the financial report. Thus from the above definition or description of
Materiality it is quite clear that the errors in materiality can always mislead the investors or
decision makers. According to the US GAAP, such items can be considered as material if it
has the potential to influence the decision of the user that is related to his economic condition
or situation (Bushman 2014). The materiality concept varies from firms to firm or from one
company or organization to another. An amount or item of $100 may not be material for a
firm or company that have a very high turnover or which operates in large scale. However, at
the same time this figure of $100 may be of material importance to such firm which have
very small turnover or which operates in small scale and makes minor profits.
After analysing the concept of materiality, it can be observed that there is no distinct
definition or perfect meaning of materiality is given. As it is seen in the above analysis, that
materiality differs from one firm to another depending upon its revenue and scale of
operation. Moreover, it is not properly mentioned under the materiality concept that
specifically which financial or accounting information are to be regarded as material
(Henderson et al. 2015). Due to this reason various financial information, which holds
immense importance, are not disclosed in the statement of financial position. Thus, it is said
that this concept of materiality is reducing the clarity and understanding of financial
statements as very often the users of these statements are deprived of certain material
information to which they are entitled.
Answer to Question b.
The concept of materiality has a very crucial role to play when it comes to the
International Integrated Reporting Framework. Through the concept of materiality, the
determination of matters that are to be included in the IR and hence ensuring conciseness can

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be achieved. The matters or elements where materiality is extremely essential includes the
following:
Through materiality:
 Identifications of important matters that are required to be included in the Integrated
Report can be considered. This includes drivers for the values, issues of several stake
or shareholders, internal and external factors, ability of the organization to create
values and company’s present performances (Pratt 2016).
 The importance and essentiality of the matters can also be assessed which are based
on the effect’s magnitude and probability of event.
 Materiality is also known for prioritising matter that are material according to their
importance and effectiveness.
 Materiality also emphasises to disclose several information that are useful for the
investors or other users of financial statements. These includes, the process of
materiality, staffs who are indulges in such process, the governance body, definition
and discussion regarding matters that are material, the performance and goals of the
business or company, uncertainties and control levels over matters that are material
and suggestions for the company (Beatty and Liao 2014).
Answer to Question c.
Initially, in the year 1992, the International Accounting Standard Committee introduced
or issued the IAS 7 – Statement of Cash Flows replacing the IAS 7 – Statement of Changes in
Financial Position. Since then, the statement was amended several times. There are various
issues which are faced by the managers or management regarding the in preparing the cash
flows statement (Macve 2015). Among them, manipulation of information in the cash flow
statement is one of the most serious issue faced by every organization or management. In this

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regards it can be said that in order to increase the net cash flows, the management of the
organization may opt for making payment to its suppliers lately. Moreover, in order to avoid
in payment of cash, the management may also decides to acquire good based on leasing. Thus
in order to solve out several issues associated with the IAS 7, recently an amendment has
been made to it. The main aim behind implementing changes in IAS 7 is to develop the
potential of the statement so that the user of the financial statements are offered with more
clarity and information regarding the financial status of the company. Firstly, in the
amendments it is clearly mentioned that every organizations are required to provide
disclosures that will assist the user of the financial statements or information in estimating the
difference in the amount of liability which arises out of its financing activities (Chan et al.
2016). Therefore, for the organization to achieve this objective, the IASB must ensure the
following amendments are to be carried out with respect to the liabilities that rises from the
company’s financial activities:
 Changes that rises out from obtaining or losing control of other or subsidiary
businesses.
 Changes arising from financial cash flows
 The impact which are created by the changing rates of foreign exchanges
 Changes for values and other changes.
It is also stated in the amendment that by offering a reconciliation between the closing
and the opening balances for those of the liabilities that arises out from financial activities in
the financial statement the requirements of the new disclosures can be fulfilled.
Apart from this, it is also considered as a major disclosure that every company must
mandatorily separate the changes in liabilities arising out from financing activities from that
of the changes that takes place in other liabilities and assets of the company.

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Answer to Question 2
Answer to question a
International Financial Reporting Standards has introduced significant changes that
were not required by individual national GAAPs. These changes in the IFRS require the
companies to undertake major changes in the way of their reporting. For example, reporting
on financial instruments and shared based payment were for the first time reported in the
financial statements of the companies due to IFRS requirements or guidelines (Warren 2016).
This results in preparation of more complex financial statements under IFRS as compared to
national GAAPs. The complexity that is encountered while preparing the books of accounts
in accordance with the IFRS is due to the complex nature of rules that lay down the
guidelines for recognition and measurement of transaction and also the increased number of
disclosures required to be given. Though the purpose of IFRS is to bring uniformity and
thereby comparability among the financial statements prepared by different companies, due
to its complexity it often causes problem for the users of financial statements in
understanding them, resulting in inconsistencies in understanding the financial statements by
the users (Barth 2015).
Within the IFRS the way in which financial statements will be made and the way they
should be presented is contained IAS 1 i.e. Presentation of Financial Statements. The
standard suggests the different ways that can be used in presenting and forming the financial
statements. There are also additional information that a country’s legislation makes
compulsory to be disclosed in the financial statements. Therefore, a uniform and optimal
form and way of presentation is yet to evolve internationally. As a result, every organisation
making a transition to IFRS does it in a way that entails minimal changes to be made in the
way of reporting done previously under national GAAP. For e.g. the companies of U.K. have
adopted the practice of recording incomes and expense in a separate statement and changes in

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equity in a separate statement whereas the companies in France have adopted the practice of
making single statement of changes in equity (Lovell 2014).
There also remains the possibility of interpreting the standards in different ways by
the companies due to the absence of clarity or guidance in some of the accounting standards.
For instance there are different methods of recording of assets as prescribed by IAS 39
“Financial Instruments: Recognition and measurement” in the books of accounts i.e. their net
realisable value or fair value.
The standards prescribed in the IFRS are not based upon principles that are consistent.
There are also conceptual inconsistencies present within as well as between the standards.
Certain standards allow the makers of financial statements the use of alternative accounting
treatments and this further adds to the sources of inconsistencies among financial statements.
For e.g. IAS31 dealing with “Interests in joint venture” allows the companies controlled
jointly can record their interest using the proportionate method or equity method. (Callen
2015). The companies may opt for the accounting practice they have been employing
according to the national GAAP. Another e.g. where alternated method of accounting has
been given is IAS 16 ‘plant property and e equipment’. The companies have been given
option either to value their asset using the cost model or the revaluation model. Also there is
very limited information regarding matters related to the industry discussed in IFRS. As a
result the selection of accounting policies is greatly significantly influenced by the
judgements of the management. This has resulted in a degree of inconsistencies and
incomparability among the financial statements of the companies.
Another instance where different accounting treatment can be adopted by different
organisation is of IFRS 1 in which the IFRS allows the companies to enjoy many exemptions
from the requirements of the IFRS. The exemptions availed by the organisations can affect

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them for years. For e.g. the companies may opt for recognising all the cumulative actuarial
losses and gains with respect to post-employment benefits but, later on decide to choose the
corridor approach. Hence the companies can opt for one time write off all its actuarial losses
thereby influencing the financial statements significantly and affecting its comparability.
Further the company after they have taken the above exemption can make use of other
comprehensive income to record their profits and losses in the period they occurred and
refrain from using the corridor approach. This leads to additional damage to the
comparability.
IAS 18 ‘Revenues’ allow recognition of revenue in alternate ways. There has been no
specific guideline laid down in the standard regarding the arrangements with multiple
deliverables. The standard only says that the transactions should be viewed in respect of their
actual substance than form. But, apart from this there are no clarifications given in the
standard. The process of identification of functional currency under IAS21 is also very
subjective. Because the functional currency of an organisation can be determined by either
the currency in which the commodity produced by the company is being sold or purchased in
the market or the currency that significantly impacts its cost of daily operations , and it is not
necessary that they would be same . This can also lead to inconsistencies.
Answer to Question b
The application of the IFRS system of reporting of financial transaction,
management’s judgement can have greater impact than that was under the national GAAP.
The IFRS uses fair value very extensively. While the management is computing or
considering issues like payments based on shares, retirement pensions, assets which are
intangible being acquired in business acquisitions and the amount by which the assets have
been impaired, the management has to use its own judgements and assumptions in selecting
valuation methods and formulating assumptions (Gumb et al. 2017). These differences in the

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methods of assumption have a significant influence on the amount that has been recorded in
the financial statements. IAS1 states that it is expected that the company will disclose the
methods, estimates and assumptions underpinning the carrying amounts if there is
considerable risk that the amount at which they are recorded in the books within the
upcoming financial year. Mostly the decision that comes from the management is that there is
no significant risk of material adjustment within the next financial year. Going by these
assumptions they are incapable in disclosing the level of uncertainty and assumption thereby
affecting the comparability.
In addition to the presence of IFRSs an efficient financial reporting framework is
necessary. The infrastructure should include corporate governance rules that are effective,
auditing methods of high quality, and an efficient oversight mechanism. Therefore we must
understand that the consistency and comparability of financial statements in addition to the
IFRSs will also depend on the presence of robust accounting framework within the
organisation (Lovell 2014).
It may also happen many persons involved with preparation of financial statements
are versed with the provisions of GAAP but, not of IFRS. This will further affect the
comparability. Also in cases when the legislation framing laws and bylaws of the market of a
country is not effective and efficient there may be lack of appropriate market information to
make use of fair value as a way of measurement, this may lead to creation of imaginary
markets or use mathematical models which will again add to the problem of differentiation
due to the inexperience of the country using these methods.
The change made from the GAAP to IFRS is definitely beneficial in the long run adding
consistency and comparability in the reporting framework all around the world. However

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there are still significant number of issues present relating to the transition which may hamper
the consistency and comparability of financial statements.

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