HI6025 Accounting Theory and Current Issues: IFRS Adoption Analysis

This report provides a comprehensive analysis of IFRS adoption, focusing on the experiences of Australia and Canada. It begins with an executive summary, followed by an introduction that highlights the importance of IFRS in ensuring transparency and comparability in financial reporting. The report delves into Positive Accounting Theory (PAT), discussing its principles and application in financial reporting, and then examines the reasons for adopting IFRS, including its benefits such as increased transparency, accountability, and efficiency. It explores transitional issues faced during IFRS implementation, challenges encountered by reporting entities, and similarities and differences in IFRS adoption between the two countries. The report concludes with recommendations for national accounting bodies regarding the future relevance of IFRS. The report also covers the impact of IFRS on Canada, and the challenges that reporting entities face in adopting IFRS, such as lack of knowledge and regulatory issues. The report also discusses the importance of IFRS in the context of financial scandals and the need for standardized accounting practices to enhance investor trust and facilitate ethical financial transactions.

Running head: ACCOUNTING THEORY AND CURRENT ISSUES
Accounting Theory and Current Issues
Name of the Student
Name of the University
Authors note

1ACCOUNTING THEORY AND CURRENT ISSUES
Executive summary
The objective of the report is to analyse the importance of te application of the IFRS
by two different countries. The report give a brief details about the challenges in
adoption of IFRS and the various principles of IFRS that create hindrance for the
reporting entities to adopt the IFRS. The report contains a details of the similarities
and differences in the accounting principles of Australia and Canada and how both
the countries try to adopt IFRS regulatuions. The report concludes with the
recoomendation to the national accounting bodies of both the countries about the
relevance of IFRS in the future.

2ACCOUNTING THEORY AND CURRENT ISSUES
Table of Contents
Introduction........................................................................................................3
Discussion..........................................................................................................4
Answer 1............................................................................................................4
Answer 2............................................................................................................6
i)Reasons for adoption of IFRS.........................................................................6
ii)Transitional isssues faced for the implementation of IFRS............................7
iii) Challenges faced by reporting entities in adopting IFRS............................8
iv) benefits of adopting IFRS...........................................................................10
v) similarities and differences in the adoption of IFRS....................................11
Answer 3..........................................................................................................12
Answer 4..........................................................................................................14
Conclusions.....................................................................................................15
References.......................................................................................................16

3ACCOUNTING THEORY AND CURRENT ISSUES
Introduction
The application of the positive accounting theory is essential for bringing
transparency in the financial statements of the organisations. The various provisions
inserted by the IFRS has made it possible for the organisations to follow a standard
accounting process that enables them to record all the financial transactions in the
books of accounts in an ethical manner and give a true and fair view of the financial
position to the stakeholders.
Different countries have different accounting system and their reporting style
is also different from other countries in order to bring a uniformity in the reporting
system the IFRS has bring a standard in the accounting process which can be used
by different countries. Though here are several challenges in adopting the IFRS but
with the increase in the occurrence of various financial scandals it become essential
for the organisations to implement the IFRS so that the investors get the correct
information related with the financial condition of the business and can take correct
decisions. In the modern days corporate bodies all over the world requires an
effective accounting system that can make it possible for them to prevent the
occurrence of any manipulation in the financial statement and that they can earn
more trust from the investors and can-do business activities fairly.
Discussion
Answer 1
Watts and Zimmerman developed positive Accounting Theory (PAT) for
making financial reports. It is calculated on the daily, monthly, and annual reports of
statements. These reports predict the choice of accounting practices preferred by the
organization and how the organization tends to respond to changing accounting
standards.
Positive Accounting Theory was developed, consisting of three hypotheses;
 The Bonus Plan Hypothesis- the bonus plan hypothesis says, all other
aspects being equal or irrelevant, managers of firms with bonus plans will
tend to choose accounting standards that will pre realize the reported
earnings from the future to present to maximize compensation.
 The Debt Covenant Hypothesis- all other aspects being equal or
irrelevant, the closer the firm is to violate the debt covenants in accounting,
it will be more likely that the manager will select the accounting procedures
that will pre realize the reported earnings from the future to present to
lessen the problem with creditors (Gupta Akhter and Chaklader 2017).
The Political Cost Hypothesis- all other aspects being equal or irrelevant,
higher political cost for the firm will result in more likeliness of the manager to select
an accounting procedure that will postpone the reported earnings in the future to
minimize the effect of political turbulence.
These theories explain the room, explored by the manager, within the GAAP
to manage reported net income. These are not fraudulent and can be done through
selecting appropriate amortization policy, being conservative or optimistic on
subjects like bad debts, provisions for warranties, etc. These all have the economic
consequence that will make or break the management's achievement of their

4ACCOUNTING THEORY AND CURRENT ISSUES
objectives. These are necessary for the administration to be flexible enough to tackle
unforeseeable circumstances. Hence, any policy that tries to lessen the flexibility in
accounting procedures will not be favored by the manager (El-Gazzar and Finn
2017).
Examples:
 In 1985, a study on PAT by Hearly established evidence regarding the
bonus plan hypothesis. He discovered, the manager who has bonus plans
tend to start using accrual policies to increase their business
systematically.
 Sweeny in 1994 further analyzed the debt covenant hypothesis and found
out firms on the verge of defaulting made more policy changes to increase
income than a control group of firms, though it later proved to be an
unsuccessful attempt to avoid.
 The study of Subramanyam is in support of PAT. He concluded that the
systematic contracting version of PAT is the authoritative form.
The main of the PAT is to interpret and forecast which accounting policies will
be beneficial for the firm. These accounting policies help to reduce contracting costs.
However, other factors are also influenced by accounting policies such as firm
structure, the operational environment, and corporate administration (Anderson
2018).
Answer 2
i)Reasons for adoption of IFRS
The International Accounting Standard Board has set some standards for
accounting structure after years of research. This was done to improve global
business by making accounts comparable and compatible. The set of standards
made was named IFRS, which stands for International Financial Reporting
Standards. Australia adopted IFRS on 1st January 2005. On the other hand, Canada
passed the IFRS standard on 1st January 2011. IFRS ensures that the accounting
of different companies and firms is done following the same standards. This makes
the Financial stats and reports easier to understand, along with making them
comparable. The need for adopting IFRS standards can be followed by the benefits it
has-
 Transparency - the method of accounting and financing would be
standardized for every company. This would increase global rapport in terms
of account and business. This will also facilitate the investors and other
business partners to take abreast monetary decisions (Sugiyama and Islam
2016).
 Accountability – Accountability is enhanced from IFRS as it reduces the data
void between the investors or capitalists and the borrowers.
 Efficiency- The implementation of IFRS standards drastically increases
investing efficiency. This helps the capital lenders to filter out risks and
opportunities across the globe. If all the companies start to use standardized
accounting methods, this will help the economy to grow rapidly.
The other need includes the increasing number of countries adopting IFRS
standards. This will give all the countries integrated and networking benefits in terms

5ACCOUNTING THEORY AND CURRENT ISSUES
of trade with each other. There will also be an increase in cross border investments
(Yang 2019).
Adoption of IFRS in CANADA
In canada domestic companies whose securities are traded in the public
market are required to fillow the IFRS regulations in their consolidated financial
statements. For the domestic companies the IFRS standards issued by the board
are applicable and the domestic companies of Canada should follow the regulations
stated by such IFRS acoounting standards.
The publicly accountable companies in Canada are required to disclose that
they are following both the regulations of Canadian GAAP as well as the provisions
of the IFRS standards. This means that the Canadian public entities are required to
follow both Canadian generally accepted accounting principle as well as the IFRS
regulations.
In Canada IFRS is adopted by including the IFRS standards in to part I of the
CPA Canada handbook- accounting and thereby making these standards as a part
of the Canadian GAAP. The method gives legal recognition to the IFRS standards
and make it relevant with the financial reporting methods that are followed by the
Canadian companies.
Impact of IFRS on Canada
 The doption of IFRS put some significant impact on the following areas in
Cnada
 It brings a postitive change in the accounting policies in Canada which ensure
better transparency.
 IFRS brings more control in mainatianing the accounting data,
 It brings efficiency in the internal control process of financial reporting,
 It impoves the controls on the disclosure of material informations, and also
helps to improve relationship with invetsors by providing true and fair view of
the financial position of the organization.
 Creating expertise on financial reporting,
 Bring more control on complicated business activities like foreign currency
and hedging activities and also in matters that can effect the organisations
due top change over like debt copvenants, need of capital and arrangements
of compensation.
ii)Transitional isssues faced for the implementation of IFRS
During the transition of financial reporting standards in Australia from previous
standards to IFRS, many issues arose. Due to the transition of standards Historial
costing by the organizations change as rates and slabs in the new standards are
different compared to the old standards. While calculations of depreciation are also
changed upon the fixed assets of the companies because rates and fixed assets
schedule is different in IFRS as compared to other accounting standards. Same as
that different methods of charging depreciation are useable under the IFRS, which
impacted the calculation of depreciation. Since the implementation of the IFRS, it
became obligatory for a centralized financial statement of the companies that were
listed as French companies (Krishnan and Zhang 2019).

6ACCOUNTING THEORY AND CURRENT ISSUES
In the transition and adoption of the standards some major issue which was
by Australia were the proper management and presentation of disclosure and all the
relevant standards to the financial statements. The transitional year also needs the
reporting of financial results of the organization twice in the year once while changing
the standards on that date, and the reporting will be according to the specified time
by the regulatory body of the country; therefore, it could cause problems (Boolaky et
al 2018).
The major transitional issues faced in canada are
Issues related with auduit of comparative figures
Due to the implementation of IFRS in the year 2011 the comparative figures in
the books of accounst in the year 2011 were required to be re audited.
Issues related with the time of audit in the financial year 2011
Due to the additional requirements under the IFRS regulations the preparation
of the financial reports will require more time.
Making changes of auditor
For adopting with the new complex requirements of IFRS new professional
audiotors will be required which effects the normal audit process.
Functional currency
With the adoption of the IFRS there will be significant variations occurs in the
accounting for foreign currencies which crates problems in the accounting for foreign
subsidiaries and foriefgn transactions and the operations (Lu et al 2018).
iii) Challenges faced by reporting entities in adopting IFRS.
The main challenge that the reporting entities faced in adoption of the IFRS is
the lack of knowledge about the various provisions of IFRS. As the provisions that
are mentioned in IFRS are very complicated and the interpretation of such rules
requires professional skill which often creates barrier for the organisation to
successfully implement the IFRS.
As the generally accepted accounting principles of different countries is
different so many accountants may find it difficult to implement the accounting
system that is specified by the IFRS. It is often observed that the accounting process
under the IFRS is principle based and that creates confusion in the mind of the
accountant who does not have enough knowledge about the practical
implementation of such principles (Morais Fialho and Dionísio 2018).
The other issues that create challenges in the adoption of IFRS are
IASB funding staffing and the structure of governance and consistent
adoption
The adopters require that they will be provided with all the independence in
applying the IFRS principles and they also need enough fund for hiring skilful staffs
who can easily implement the principle of IFRS.
Regulatory issues

7ACCOUNTING THEORY AND CURRENT ISSUES
The adoption of IFRS also requires regulatory approval from the respective
governing body that regulates the accounting principles of any particular country.
This creates a major challenge for the reporting entities to implement IFRS
regulations (Cereola Nichols and Street 2017).
Compliance and enforcement challenges
There are several compliance related issues with IFRS which may create
problem in the successful adoption of IFRS by various reporting entities of different
countries. Enforcement is also a major challenge as the enforcement mechanism of
IFRS will be very difficult for jurisdictions which have weak institutions and
enforcement agencies.
There are several accounting standards under the IFRS which are difficult to
adopt for different countries for example
IAS 39 it is the accounting standard that is related with the recognition and
measurement of the financial instruments
IAS 41, accounting standards for agriculture
The market structure of many countries generally does not have sufficient
depth and breadth for the accurate determination of the fair values. The IFRS
accounting standard IAS 39 does not provide any viable guidelines regarding the
measurement process of the fair valuation of the financial instruments which creates
a major challenge for the adoption of this accounting standard.
iv) benefits of adopting IFRS
IFRS has some great benefits in relevance to reporting entities. The obvious
benefits for organizations or reporting entities that use globally accepted financial
reporting standards. Reduced price of capital, enhanced access to reservoirs of
finance, better comparability of monetary statements, and higher quality economical
reporting are all cited as reasons for supporting harmonization of accounting practice
(Trimble 2017).
Due to IFRS, reporting entities will produce a standardized and persistent set
of accounting and financial reports for abiding with local lawful and stable
requirements. This may help to improve the analysis of monetary reporting and tax
planning processes. IFRS is a revolution in the field of economy, and account, it will
help to save money for reporting entities. Since IFRS provides a single set of
guidelines for all the countries, it would increase the number of global merges of
accounting entities make them more prominent companies and increasing profits
drastically (Houqe and Monem 2016).
The global stakeholders would be more confident with their accounting
entities. This would result in more and more international reporting entities benefiting
both countries. This prevents manipulations and errors in financial documents. Many
significant business decisions are periodically made on the idea of monetary
statements. However, financial information is hospitable manipulation or mistakes.
To prevent manipulation of figures within the financial accounts, there must be a
systematic and reliable way of choosing which elements are recognized and
measured, and the way information is presented within the financial statements.

8ACCOUNTING THEORY AND CURRENT ISSUES
The most important fact is long-run users who also enjoy the benefits of
perceiving the financial data, whether it comes from one country to another. IFRS
accounting protocols require that each one company follow equivalent guidelines.
When the top user views these protocol for an accounting entity in one country, it will
be assumed that each company in compliance with IFRS follow equivalent protocols
regardless of country (Miah 2017).
v) similarities and differences in the adoption of IFRS
Australia faced various issues on the adoption of IFRS as in the presentation
of disclosures in the financial statements as there are different disclosures. Change
in the tax rates and slabs was also creating impact; therefore, some significant
issues created for the adoption of financial reporting standards in the country. Same
as that, Canada has also adopted IFRS a few years back. The same problem of
adoption of disclosure and their proper presentation was an issue for them, which
they faced (Said 2019).
Several factors caused the difference in the adoption of financial reporting
standards in Australia and Canada. These standards are challenging to imply
certainly because it can change the presentation and results of the financial
statement of the organizations majorly. The IFRS was more liberal than Australian's
GAAP as the IFRS was based more on principles, which in a way contradicted the
pre-existing accounting standard of Australia. The comparability of IFRS with the
laws was also challenging for Australia. Canada also had comparability problems as
it implement IFRS recently and Canda has lack of skillful professionals who can
adapt the regulations of IFRS (Pawsey 2016).
In canada the major problem that is faced by the organization is to harmonise
the standards that are prescribed by IFRS and the regulations provided by the
canadian accounting standard board. Before the implementation of IFRS the AcSB
is the main regulatory body which sets the applicable standards that are required for
financial reporting. The organisations in Canada specially the small sized entities
faced huge difficulty to make changes in their rules and in implementing the IFRS
standards for preparing their financial reports. For this reason in the initial stage the
entities used to follow both the rules of AcSB and the IFRS and for that rason their
cost of preparation of financial reporting increased and the organisations also have
to give additional time for such complicated work.
As already mentioned, the process was relatively smoother in Australia than
in Canada. The reason being the difference in already existing national accounting
standards in both countries were quite different. Also, the difference in accounting
structures, laws, and years of implementation affected respectively on both the
countries.
For the current time, both countries have implemented successfully and are
now enjoying the benefits of the IFRS standards.
Answer 3
Following the European's announcement that their aggregated financial
reports in section with both the IFRS would have to be prepared by EU entries in
2005, Australia and Canada both revealed that they would be going to follow.
Australia's surprise was announced as an outcome of the EU vote. In Australia and

9ACCOUNTING THEORY AND CURRENT ISSUES
Canada, decisions in a broader range of organizations and financial reports were
different from EU decisions (Alshamari Raghavan and Shantapriyan 2018).
On 19 December 2002, ASRB stated that it would allow IFRS reporting
entities in Canada to, phrases that commence or end on 1 January 2011 and that
reporting entities will have the option of accepting IFRS on 1 January 2011. The
opinion of ASRB was different from that of the EU. First of all, both consolidated and
individual financial reports are needed in Canada, whereas it refers only to
consolidated financial statements in the European Union. Secondly, since the
beginning of 2011, the criterion for Canada is the preference for 2005 IFRS, while
2005 is the standard in the EU (Krishnan and Zhang 2019).
 For most of the sectors, the transition process was reasonably
smooth.
 IFRSs are a proper basis for the NFS standards developed by the
AASB; however, change was required in respect of quality and cost-
efficiency of reporting.
 An open advantage element will possibly, at the same time, conform to
IFRS on the off chance that it does not have significant bearing any of
the extra estimations and acknowledgment necessities.
 The EDs will contain the IFRS, including the extra necessities for open
advantageous substances and bearing a few alternatives.
 The EDs will likewise give an examination of the current budgetary
detailing prerequisites in Canada and the comparing IFRS and
solicitation remark to the FRSB.
 The IASB has affirmed that adding revelation prerequisites to or taking
out decisions contained in IFRS does not risk consistency with IFRS.
 The EDs could likewise contain changes that are required to be made
by the IASB to IFRS before 2005
 IFRSs are customized for the benefit arranged elements ye
Canadaplans to apply them to all substances.
 The issue of PS4 in Australia and US GAAP in Canada shows neither
one of the countries proposed to embrace IFRS whenever sooner
rather than later wholly.
 IFRSs are customized for the benefit arranged elements yet Canada
to apply them to all substances.
 Where a benefit orientated revealing element remedies its
announcement as per Canada IFRS it will at the same time agree to
IFRS
Answer 4
The two essential recommendations for implementation of IFRS across
Australia, to improve a faithful portrayal of the globally adopted accounting standards
that help in decision-makers in evaluating and differentiating an entity's financial
position and performance are as follows-
 The IASB should be coordinating with a network of regulators, audit and
securities, setters, regional and standard, other accounting bodies, and the
relevant stakeholders to determine and report the divergence from the
standard financial reporting. Moreover, the IASB recommended resolving

10ACCOUNTING THEORY AND CURRENT ISSUES
the separation through improvement in accounting standards to comply
with a globally adopted accounting standard across the borders.
 The IASB should work in partnership across all the relevant authorities to
determine the modifications in its compliance and, under that situation,
encourages a more transparent financial reporting of such changes under
jurisdiction.
In Canada, the IFRS system goes hand in hand with Canadian generally
accepted accounting principle. For smooth operation, the domestic requirements
which vary from organisations to organisations should be made universal for quick
transitions and cooperation. The two recommendations for the implementation of the
IFRS across Canada to adopt the globally adopted financial reporting are as follow
 To make it more worthy and useful for small-sized businesses entities,
more transparency of system processes of quality and disclosures of
information is necessary.
 For making IFRS standards more proficient for small scale entities, more
provision of information of the legal codes, improvisation of quality and
cost structure of the system for financial reporting.
The IFRSs continue to be relevant to the user's needs, and all the sectors of
the economy depend upon the public accountability and independence of the
financial reporting standards. To maintain its commitment to setting the global
standard fr the accounting practices, the IASB focuses on a long goal of adoption of
IFRS. With cooperation from the national setters and other relevant stakeholders, the
IFRS foundation determines the disclosure of those where its adaptation is
incomplete or where there is a divergence observed to comply with the full sets of
IFRS issued by IASB. However, the IFRS still seeks a mechanism to determine
those instances where IFRS asserts jurisdictions are not fully adopted (Nobes and
Zeff 2016).
Conclusions
From the above discussion it can be concluded that the application of IFRS
might be difficult to adopt for various countries but in order to bring more reliability in
the financial statements it is essential to adopt IFRS principles and guidelines as
these are more relevant and bring more control in the process of recording the
accounting data. The principles of IFRS can provide more refined view of the
performance of the organisations and can bring more regulatory control in the books
of accounts. Almost all the big companies in Australia and Canada has started to
adopt IFRS regulations as they understood that in future IFRS will be the only option
and there will be no other alternative accounting principle.

11ACCOUNTING THEORY AND CURRENT ISSUES
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