HI6025 Accounting: Evaluating the Impact of IFRS in Australia

This report analyzes the impact of IFRS adoption on Australian financial reporting, focusing on changes in equities, surpluses, assets, and liabilities of local government entities. It examines a research paper that details the effects of transitioning from Australian Accounting Standards (AAS) to IFRS, highlighting differences in financial statement items like depreciation, employee benefits, and interest expenses. The report also considers the impact on small and medium-sized firms, concluding that while some researchers believe IFRS adoption improved reporting quality and reduced earning management, others argue it increased complexity. Ultimately, the report suggests that IFRS adoption offers long-term advantages by harmonizing accounting frameworks and facilitating international investment. Desklib provides access to this and other solved assignments to aid students in their studies.

Implications of International Accounting in Australia after IFRS
Period
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Contents
Executive summary.........................................................................................................................3
Introduction......................................................................................................................................4
Practical explanation of chosen topic..............................................................................................5
Conceptual knowledge.....................................................................................................................6
Summary and practical contribution................................................................................................8
References........................................................................................................................................9
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Executive summary
Main objective of this report is to identify the changes that has occurred in financial statement
and financial accounting process of business entities working in Australia due to implementation
of IFRS. Here an article is analyzed that evaluates the impact of changes in accounting
framework to IFRS on business entities operating in Australia. Analysis is done on the basis of
article under evaluation and other articles that are published regarding same subject matter.
Overall conclusion is made on the basis various views presented by different authors in rested of
changes that occurred due to implementation of IFRS.
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Introduction
This report is based on published journal article titled “The Effect of IFRS Adoption on the
Financial Reports of Local Government Entities” written by Kamran Ahmed and Manzurul
Alam. This article has detailed out the Impact of adoption of IFRS on the financial accounting
process of Australian companies. Main focus of this article is on changes in accounting valuation
and estimation that have occurred in the process of adoption of International Financial reporting
standards which has replaced previous Australian Accounting Standards. This change was done
to harmonize the accounting and reporting framework used by Australian companies with that of
accounting reporting of companies in international market.
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Practical explanation of chosen topic
This report is focused on the impact that adoption of IFRS has put on equities, surpluses, assets
and liabilities of local government entities working in Australia. The implementation of IFRS
model is sector neutral that means that this framework is applicable on all business sector
including local government entities and non-profit organizations. Prior to implementation of
IFRS, the accounting of government sector companies were governed and based on three major
Australian Accounting Standards i.e. AAS 27, AAS 29 and AAS31(Zeghal & Lahmar¸2016).
With introduction of IFRS the accounting standards for all organization have become same for
each and every sector. In initial years of its implementation, local government organizations
were required to maintain their books of accounts and financial statements according to both
IFRS and Three Australian accounting standards mentioned above. As main purpose of this
paper it to analyze the effect of financial accounting framework on profitability and other aspects
of business in an operational organization. Analysis of financial statement of local government
entities before and after implementation of IFRS would be ideal as they have prepared financial
statements for year ending 2005 with both these methods (Tran & Zhu, 2017).
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Conceptual knowledge
For effective analysis, this research paper has collected data from all the local departments of
New South Wales (NSW), Queensland (QLD), South Australia (SA) and Victoria (VIC). Sample
data collected from different departments is as follows-
N Percentage
of total
New South
Wales
Queensland South
Australia
Victoria
City
council
61 52% 18 6 12 25
Shire
Council
50 43% 15 4 8 23
District
Council
6 5% 6 0 0 0
Total 117 100% 39 10 20 48
The researcher have prepared a reconciliation statement that shows the difference in equities,
surpluses, assets and liabilities with the financial statement prepared with IFRS and applicable
ASA on such local government (Clarkson, Hanna and Richardson, 2011).
Main items in financial statements that has shown difference in surplus are interest earned from
council, retained earnings, accumulated profits and errors carried from last financial year. Mean
median and standard deviations are calculated to evaluate this impact. Previous to the
implementation of IFRS, it was argued that smaller business organizations working in Australia
would be at higher disadvantage as they have lower resources and there were very few experts of
IFRS at that time. To evaluate the accuracy of this argument research was conducted on 135
small size firms by Goodwin and Ahmed in 2006. This research showed that more than 50% of
these firms did not have any impact on their net profit or loss. In opposition to the initial review,
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this research indicated that the profits of these small and medium size companies has increased
after adoption of IFRS as their accounting frame work (Ahmed and Alam, 2012).
It can be said that changing accounting framework to IFRS has been an effective and huge
change in Australian accounting system. There have been various debated whether it should be
implemented or not. This research has concluded that there have been various differences in
surplus, assets, liabilities and reserves between the accounting framework of IFRS and AASB.
Major changes that can be evaluated in the mentioned research are depreciation, amortized
expenses, employee benefits; indirect revenue, interest expenses in relation to borrowings, PPE
loss and gain, and materials. On conducting an overall analysis it can be said that in majority of
local departments, surplus has decreased but there have been significant increase in equity of
these departments. This is the situation of small local government departments but in case of
large departments, there has been an increase in both equity and surplus (Jeanjean & Stolowy,
2008).
One of the biggest limitation of this research is that it is limited to government entities. This
research cannot be considered as a conclusion study and there is a requirement of conducting and
studying other studies to evaluate true impact of adopting IFRS on organizations working in
Australia.
This research has explained that there are no significant impact on overall valuation and
profitability of the companies in government sectors due to introduction of IFRS in Australian
accounting framework. The case would be same in other industries and nature of business as the
standards of IFRS do not change with the change in nature and size of business (Wang &
Welker, 2011). In long run this is an advantageous step for businesses as they have adopted a
universal accounting framework. The valuation of business could be done in better manner and
comparison can be made with other organization with ease as all businesses will follow similar
accounting framework (Cotter, Tarca & Wee, 2012).
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Summary and practical contribution
There have been various studies on this matter and there have been different conclusion of these
reports. Some of the researchers believe that there have been positive impact of adoption of IFRS
on business organizations in Australia as less companies are not engaging in earning
management after such adoption (Horton, Serafeim & Serafeim, 2013). Earning management
was an accounting manipulation phenomenon that was used by management of company to
change their accounting representation in such as was that profits of the company are deceitfully
increased to attract more and more investors in the company. Use of this accounting
manipulation technique has decreased after adoption of IFRS. These are very low scope of
loopholes in accounting principles of IFRS that gives very less room for accounting
manipulation. In addition to that researchers have also identified that this change in accounting
framework has also improved the quality of reporting and accounting frameworks (Bryce, Ali &
Mather, 2015).
There are some researchers that do not agree with the above findings as they think that quality of
accounting representation has remained the same. On the other hand they are of the opinion that
this change has increased the complexity in the process of accounting and reporting. According
to them, Pre IFRS accounting treatment of certain accounting items were better as compares to
accounting treatment given by IFRS such as “Accounting for identifiable tangible assets”.
A research conducted by Australian Accounting Standard Board” has stated that process of
accounting transition from pre-IFRS period and Post IFRS period has been very smooth and
effective. IFRS standards were modified by the AASB to help management of companies in easy
implementation in early implementation years (Ahmed, Chalmers & Khlif, 2013). Business
organizations have found various advantages of this new accounting framework that would help
them in growth and development. For example, due to adoption of harmonized accounting
framework companies working in multiple sectors can move in different sectors without any
major changes in accounting policies. Possibly one of the biggest advantage of this change
would be that multinational companies will be more open for investment in Australian
companies as their accounting frameworks is same as framework adopted by companies in rest
of the world.
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References
Ahmed, K. and Alam, M., 2012. The effect of IFRS adoption on the financial reports of local
government entities. Australasian Accounting, Business and Finance Journal, 6(3), pp.109-
120.
Ahmed, K., Chalmers, K., & Khlif, H. (2013). A meta-analysis of IFRS adoption effects. The
International Journal of Accounting, 48(2), 173-217.
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.
Clarkson, P., Hanna, J. D., Richardson, G. D., & Thompson, R. (2011). The impact of IFRS
adoption on the value relevance of book value and earnings. Journal of Contemporary
Accounting & Economics, 7(1), 1-17.
Cotter, J., Tarca, A., & Wee, M. (2012). IFRS adoption and analysts’ earnings forecasts:
Australian evidence. Accounting & Finance, 52(2), 395-419.
Horton, J., Serafeim, G., & Serafeim, I. (2013). Does mandatory IFRS adoption improve the
information environment. Contemporary accounting research, 30(1), 388-423.
Jeanjean, T., & Stolowy, H. (2008). Do accounting standards matter? An exploratory analysis of
earnings management before and after IFRS adoption. Journal of accounting and public
policy, 27(6), 480-494.
Tran, A., & Zhu, Y. H. (2017). The impact of adopting IFRS on corporate ETR and book-tax
income gap. In Australian Tax Forum (Vol. 32, No. 4, p. 757). Tax Institute.
Wang, S., & Welker, M. (2011). Timing equity issuance in response to information asymmetry
arising from IFRS adoption in Australia and Europe. Journal of Accounting
Research, 49(1), 257-307.
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Zeghal, D., & Lahmar, Z. (2016). The Impact of IFRS Adoption on Accounting Conservatism in
the European Union. International Journal of Accounting and Financial Reporting, 6(1),
127-160.
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