International Accounting in australia PDF

Running head: INTERNATIONAL ACCOUNTING 1
IMPLICATIONS OF INTERNATIONAL ACCOUNTING IN AUSTRALIA AFTER IFRS
PERIOD
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INTERNATIONAL ACCOUNTING 2
Executive Summary
This paper provides an analysis of changes in deferred acquisition cost and Non-accrual
loans, Fair Value Measurement, treatment of hedges after the adoption of IFRS standards in
Australia since 1st January 2005. The report is based the findings of a study by Keryn
Chalmers, Jayne M Godfrey and Greg Clinch, 2011. They established that there was an
increase in the importance of earnings after Australia adopted IFRS. Therefore, the paper
provides how these changes are related to deferred acquisition cost and Non-accrual loans,
Fair Value Measurement, treatment of hedges

INTERNATIONAL ACCOUNTING 3
IMPLICATIONS OF INTERNATIONAL ACCOUNTING IN AUSTRALIA AFTER IFRS
PERIOD
Introduction
This report provides an analysis of changes in deferred acquisition cost and Non-accrual
loans, Fair Value Measurement, treatment of hedges as a result of accounting policy changes
in Australian Accounting Standards after the adoption of International Financial Reporting in
Australia. The report is based on analysis of a Journal article, Changes in value relevance of
accounting information upon IFRS adoption: Evidence from Australia by Keryn Chalmers,
Greg Clinch and Jayne M Godfrey, 2011. IFRS are standards provided by the IASB and IFRS
Foundation. Because of growth in international trade and shareholding, there was a need to
come up with uniform standards of financial reporting.
In the study, Chalmers et al examined the possibility that the adoption of IFRS in Australia
enabled an increase in the importance of accounting information for corporate listed in the
Australian Security Exchange. Through using a longitudinal study, they studied the status of
Australian accounting before and after IFRS between 1990 and 2008 (Keryn Chalmers, 2011,
p. 152). They established that after Australia adopted IFRS standards, the relevance of
earnings increased.
Fair Value Measurement
In Australia, the net market value is constituted by the general and life insurers. This is built
by the market environment approximated by fair value. Experts say that before adoption of
IFRS in the country, AASB standards lacked clarity in the guidance used to measure financial
liabilities and assets. In AASB 139, financial assets are categorised into 4 classes: loans and

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receivables, assets held to maturity, assets held for trading or held at fair value through loss
or profit, and available for sales (BDO, 2015, p. 4). The AASB standards provided that
financial assets held at maturity, receivables and loans and assets available for sale are all
valued in terms of amortised cost. However, initially, AASB directed that all financial
liabilities were to be valued based on the effective interest rate method. This shows that the
AASB standards had mixed measurement model. This allowed some financial liabilities and
assets to be measured at amortised cost while others are measured at fair value. The fair value
option has sparked a strong debate regarding its efficiency, reliability, and accuracy in
measuring financial assets and liabilities (Tan‐Kantor, 2017, p. 35). This has made some
regions to amend it to accommodate friendlier terms and easier application. For example, the
European Union struck out the option of fair value measurement from its IFRS standards.
The International Financial Reporting Standards give 13 frameworks that are principle-based
to measure fair value. They are based on most efficient use, exit price, premise of valuation,
and assumptions by market participant, hierarchy of fair value, account unit and principal
market (Ernst & Young, 2012, p. 6). As a result, they have provided comparability and
consistency in financially reporting fair value estimates (Rahman, 2016, p. 291). Hence there
are orderly transactions between market participants within market conditions available on
measurement date.
Non-accrual loans and deferred acquisition costs
According to section 139 of AASB, effective interest rate should be used to measure the
value of assets and liabilities. This involves transactions costs like commissions and fees
given to advisors, agents, brokers, transfer tax and duties, and security exchange (AASB,
2015, p. 26). This method enabled financial institutions to include interest gotten from non-

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accrual loans in the cash flow. Then this is used to establish the value of financial assets in
terms of amortised cost (Cieslewicz, 2014, p. 511). However, it was discovered that this
technique was inconsistent with how most institutions recognised and treated non-accrual
loans.
Before IFRS was adopted in Australia, acquisitions costs were incurred in getting and
recording insurance policies. This included brokerage and commissions paid to brokers or
agents for getting business on behalf of the insurer, selling and underwriting costs on
activities like risk assessment and advertising.
However, after adopting of IFRS standards in Australia in 2005, adjustments were made to
regulations regarding deferred acquisition cost and non-accrual loans (PWC, 2014, p. 21).
For example, in AASB 1023, there are guidelines on the General Insurance Contracts. Unlike
before, now there is a requirement the process of amortising DAC should be done in a way
that coincides with incidence risk pattern (AASB, 2014, p. 21). Similarly, the revised AASB
118 provides that DAC asset is not subject to recognition on the balance sheet. This is only
applicable to the limit where acquisition expenses can be deferred but still be gotten from
management service revenues in future (AASB, 2014, p. 22). This change has various
implications to different financial sectors. For example, for general insurers, it implies that
Deferred Acquisitions Assets are not part of the calculation of 1 Tier Capital. Also, it means
that they are not recognised for prudential purposes.
Treatment of hedges
A Hedge instrument is a designated derivative or non-derivative liability or asset. The fair
value or cash flow of a hedge instrument causes changes to budget (AASB, 2015, p. 5).

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Before revision, AASB 139 standards lacked an efficient strategy for designating liabilities
and assets in terms of hedge instrument (PricewaterhouseCoopers, 2016, p. 7).
Admittedly, various entities are exposed to financial risks emanating from various aspects in
the business environment. The level of concern depends on the type of entity and extent of
risk. For example, there are entities that are concerned with exchange rates or interest rates
while there are also others who are only concerned with the prices of commodities
(PricewaterhouseCoopers, 2016, p. 3). Nevertheless, through hedge accounting, these entities
are able to reduce their risk exposures through implementing different risk management
strategies.
The new IFRS 9 standards brought improvements to the usefulness of decisions and process
of making them regarding financial statements. This is because it provided better alignment
in hedge accounting. Specifically, it strengthened risk management activities of an entity
(PricewaterhouseCoopers, 2016, p. 1). Consequently, corporate now experience flexibility
because they can apply hedge accounting in areas that they were previously not allowed.
Therefore, because of the new guidelines of IFRS regarding hedge accounting, the revised
version of AASB 139 brought classification of the hedge items into four categories: portfolio
hedge of interest risk, fair value, net investment hedge and cash flow. To offset the fair value
of assets, firm commitment or liability, a fair value hedge is used (AASB, 2015, p. 6). To
hedge cash flows of an existing floating liability or rate asset or forecasted transactions, cash
flow hedges are used. These are later measured at amortised cost.
Consequently, AASB 139 provides that fair value hedges based on loss or gain should be
accounted for in terms of profit and loss. This should be alongside change in the value of
hedged item. The implication of this is that both the hedging instrument and hedged item are

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recognised at the same time. Also, if there is any ineffectiveness within the hedge, it is
recorded in loss or profit. Further, the revised AASB 139 requires that there should be a
portion of the fair value loss or gain in the hedge instrument when accounting for cash flow
hedges. It should be recognised in terms of equity and those lacking corresponding loss or
gain should be recorded against exposure of hedge.
How Findings align with international accounting
The process of developing IFRS was based on the need to create uniform standards for
financial reporting to ensure better understanding and flexibility especially for organizations
that operate in home and host countries. Thus, they provide guidelines important in providing
uniformity in maintaining books of accounts which are reliable, comparable, understandable
and relevant. Australia adopted the IFRS standards on 1st January 2005. Since then, they
have been applied to all sectors of the economy in both for-profit and non-profit entities
within all the three tiers of the government. Deferred acquisition cost and Non-accrual loans,
Fair Value Measurement, treatment of hedges in Australia had significant differences with
other countries.
However, after the development of international accounting, gaps were realized and filled.
For example, IFRS brought improvements to the strategies of risk management in AASB.
This is through regulations provided in AASB regarding hedge accounting now recognizes
hedge in terms of loss and profit. It also emphasizes proper documentation to offer reliability
and accountability in hedge treatment. Similarly, the changes have brought restrictions to
extent of application of the option of fair value to at least one area (AASB, 2006, p. 32).
Meaning, unlike before, the AASB standards on fair value measurement regulations do not
include losses and gains in capital raises regulations due to concerns in supervision.

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In conclusion, the purpose of this report involved an analysis of changes in deferred
acquisition cost and Non-accrual loans, Fair Value Measurement, treatment of hedges as a
result of accounting policy changes in AASB policies following the adoption of IFRS in
Australia from 1st January 2005. Before the adoption of IFRS, fair value measurement lacked
clarity in designating value for financial assets and liabilities. However, due to IFRS, AASB
policies were changed to limit the scope of application to at least one jurisdiction. In terms of
Non-accrual loans and deferred acquisition costs, IFRS has ensured that Deferred
Acquisitions Assets are not part of the calculation of 1 Tier Capital and not recognised for
prudential purposes. In the context of treatment of hedges, IFRS has provided better
alignment through strengthening risk management activities of an entity.

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References List
AASB, 2006. Proposed Amendments to AASB 123, s.l.: AASB.
AASB, 2014. General Insurance Contracts, s.l.: s.n.
AASB, 2015. Financial Instruments: Recognition and, s.l.: Commonwealth of Australia .
AASB, 2015. Presentation of Financial Statements, Victoria: AASB .
BDO, 2015. Who Are The Early Adopters Of The New AASB 9 Hedge. BDO Accounting
News, July, pp. 2-7.
Cieslewicz, J. K., 2014. Relationships between national economic culture, institutions, and
accounting: Implications for IFRS. Critical perspectives on accounting, pp. 511-528.
Keryn Chalmers, G. C. a. J. M. G., 2011. Changes in value relevance of accounting
information upon IFRS adoption: Evidence from Australia. Australian Journal of
Management, II(36), pp. 151-173.
PricewaterhouseCoopers, 2016. Practical guide. PWC, November, pp. 4-28.
PWC, 2014. US GAAP and IFRS accounting,
Rahman, H. K. a. A., 2016. The role of corporate governance in accounting discretion under
IFRS: Goodwill impairment in Australia. journal of Contemporary Accounting & Economics,
12(3), pp. 290-308.