In-depth Report: Accounting Standards, IAS 16, and Industry Impact

This report provides a comprehensive analysis of current developments in accounting standards, focusing on the impact of recent changes implemented by the AASB and a review of the exposure draft related to IAS 16: Property, Plant and Equipment. It examines an article discussing the challenges Australian corporations face in complying with new standards like AASB 9, 15, and 16, highlighting issues of non-compliance and the potential for material misstatements in financial reports. The report also delves into the conceptual accounting framework, stakeholder theory, and continuous disclosure theory, emphasizing the ethical responsibilities of businesses to provide transparent and reliable financial information. Furthermore, it evaluates an exposure draft published by the IASB regarding amendments to IAS 16, including an analysis of comments received and the implications of these proposed changes for measuring property, plant, and equipment. The report concludes by underscoring the importance of adhering to accounting standards for maintaining investor trust and ensuring long-term sustainable growth.

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Current Development in Account Thoughts

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Introduction
This report has been developed for enhancing the knowledge base of the accounting
professionals in relation to latest accounting news and issues. This has been taken into
consideration on the perspective of a senior accountant of a firm involved in providing an
understanding of the accounting article to the CEO for enabling her full participation in the lively
disclosure at an upcoming conference. In addition to this, the report reviews the exposure draft
related to an upcoming accounting standard and discussion of the opinion of other industry
players in its relation through reviewing its comment letters.
Solution 1:
The article selected for the reviewing purpose is ‘Australia’s big corporate struggle with
new accounting standards’ that has been published as recent accounting news in Australia in
January 2018 in accountants daily. The article has discussed the impact of recent changes in
accounting standards implemented by AASB on the performance of business corporations. It has
been depicted in the article that less that 10 per cent of the companies listed on ASX 100 are at
present is able to comply with the recent changes in the Australian accounting standards. The
three major accounting standards that have undergone changes as per the AASB directions are
also discussed in the article. The three accounting standards are AASB 9 Financial Instruments,
AASB 15 Revenue from Contracts with Customers and AASB 16 for leases. The article has
discussed that large number of companies has not identified the changes in the accounting
standards to have a material impact on their financial statements. In addition to this, there is
small number of companies that have complied with the recent changes in the accounting
standards proposed by AASB (Lian, 2018).

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Also, there are only small numbers of entities within the country that have made adequate
disclosure in relation to the impact of the new AASB standards on their financial reporting
process. This is causing an issue of major concern for the investors and other users of the
financial report to make informed decisions due to ambiguousness present in the mind regarding
the impact of the new standards on their potential future growth. Thus, the business entities
within Australia are at present underestimating the impact of the new standards on the financial
reporting process. This can result in the occurrence of any error of material misstatement in the
company’s financial statements as the new standards can have a large impact on the profitability
position, assets and dividend capability of the company. As such, there are increased chances of
error of occurrence in the financial reports thus impacting the trust and confidence of the
investors (Lian, 2018).
This is against the conceptual accounting framework of AASB as per which the business
entities need to provide reliable and faithful presentation of information to the end-users. In
addition to these fundamental characteristics, the conceptual accounting framework has also
provided some enhanced qualitative characteristics that need to be present within the financial
information. These are understandability, comparability, verifiability and timeliness that ensure
the information disclosed is of high quality to meet the varying needs and expectations of the
stakeholders. The conceptual accounting framework is developed on the basis of normative
theory of accounting. The normative theory of accounting is based on deductive reasoning and
has prescribed the accounting procedures and policies that need to be adopted by business
corporations rather than that are followed by them. The theory has provided subjective
knowledge that leads to the development of accounting policies and principles. The theories have
provided their opinion on the basis of subjective knowledge of accounting that has lead to the

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development of qualitative characteristics of conceptual accounting framework (Riahi-Belkaoui,
2004).
The accounting framework need to be followed by all the business entities as stated by
IASB (International Accounting Standard Board) for meeting the general interests of
stakeholders. The framework has directed the compliance of the business entities with the
accounting standards and regulations for preparing and presentation of their financial reports. As
such, the Australian business entities need to develop the financial reports in accordance with all
the AASB standards to provide true and fair view of their financial position. This is essential in
accordance with the stakeholder theory that has directed the business managers to conduct the
operational activities of companies in such a manner leading to maximization of the value for
stakeholders. Thus, a business entity needs to carry out its operations as per the ethical standards
that are based on its compliance with standard accounting policies and regulations (Wasieleski &
Weber, 2017).
However, the non-compliance of the business companies in Australia with the new
AASB standards can be regarded as an act of against the stakeholder and accounting theories.
This is unethical on the part of business entities to conceal the materialistic information from the
stakeholders that can have an impact on their decision-making. It can lead to false decision-
making that can have an impact on the gains realized from the investors by investing in the
company. It has been identified in the article that the new standards have direct impact on
causing changes in the profit position, net assets and dividend capability. Therefore, it is
essential for the business entities to disclose the significant impacts that the new standards could
have on the financial outcomes. As such, the investors will acquire knowledge about the changes

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in the financial position of the company on the application of new accounting standards (Parker,
2013).
The major reason that can be identified from the article reading the non-adoption of new
standards by business entities is the required changes in their accounting systems and processes.
This requires significant investment and time on the part of the business entities and this is
becoming a major reason for the companies to restrict the adoption of these standards. The
business entities need to cause large scale changes in their financial reporting process and can
negatively impact their profitability position. This can have a negative impact on the mind of
stakeholders and restricting their sustainable growth and development (Lian, 2018).
ASIC is placing higher emphasis of developing reminder for companies to comply with
the new accounting standards that will be effective from the year 2018. In this context, it has also
implemented the use of a financial reporting surveillance program for improving the quality of
financial reporting. The program is developed particularly to review the annual and middle year
financial results of selected ASX listed companies for monitoring their compliance with the
Corporations Act and AASB. This is done for identifying the extent of their adoption to the new
accounting systems. The program has been undertaken by ASIC due to ignorance of the ASX
companies to implement the recent changes in the accounting standards and regulations. It has
been identified by ASIC that there are large numbers of companies listed on ASX that have not
yet initialed the process of complying with the ASX. They are not able to quantify the impact of
AASB 9 and 15 on their financial reporting process (Surprising’ 2017 reports prompt ASIC’s
caution to accountants, auditors, 2018).

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ASIC have maintained that business entities are not complying effectively with the
continuous disclosure theory developed by the governance framework of the ASX Council. The
theory is aimed to improve the transparency in the financial reporting process of the companies
to ASX. As per the governance theory of continuous disclosure, the business companies need to
provide timely and relevant disclosure of information to the stakeholders about the process of
preparation of its financial reports to the end-users. The financial reports should be prepared on a
timely basis that contains all the required information that the end-users need to take informed
decisions. The business entities act against the standard corporate governance framework
provided by Council with non-disclosure of information relating to the new accounting standards
that can have a potential impact on their financial outcomes (Lian, 2018). The investors interest
can have a large negative impact as the prediction made by them regarding the potential financial
growth of an entity can be false in the absence of complete disclosure of information. As such,
ASIC has recommended to the companies to make disclosure about the new accounting
standards in their financial reports to protect the interests of investors. This is essential to
maintain ethical standards within the business operations and promoting their long-term growth
and development due to negative impact on the mind of investors (Ordelheide, 2016).
Solution 2:
In this area of report exposure draft published by the IASB on their web portal related to
the property, plant and equipment has been examined and comments letter received on exposure
draft has been evaluated to provide the feedback on the proposed changes in the IAS 16:
Property, plant and Equipment. The exposure draft has been published on June 2017 and it is
named as Property, Plant and Equipment— Proceeds before Intended Use proposed amendments
to IAS 16. As mentioned in the exposure draft the comments are invited till 19 October, 2017. In

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this exposure draft International Accounting Standard Board (IASB) has proposed to make
changes in the IAS 16 Property, plant and Equipment. This amendment has make changes in the
existing provisions of the accounting standard. As per the changes amendment will prohibit the
deduction of the cost of an item that belongs to property, plant and equipment from the selling
the goods that are produced while bringing the assets to the place of the work which is required
to operating in the manner as required by the management. Instead, management would
recognize the sales proceeds from the goods into the profit and loss account (Epstein &
Jermakowicz, 2008).
Changes in accounting standard IAS 16 as suggested by the exposure draft
The IASB has received the request from various business entities and other accounting
professional for the accounting expenses that occurs before the actual start of the business. The
expenses are being related to testing equipment and other assets that are being purchased for
carrying of testing of assets before it is being actual put to use. IASB has taken into consideration
all the requirements of business entities and has suggested some changes in the accounting
standard IAS 16: Property, plant and equipment and these changes have been provided in the
exposure draft. The main purpose of exposure draft is to put the required changes in front of the
people to invite the comments on the exposure draft if they are against or in favor of the
suggested changes. The comments letters provided by the experts all over the world contains the
information that proposed are in favor or they required some more modifications. The changes
suggested by the exposure draft are regarding the measuring of property, plant and equipment.
IAS 16 applies to all the business entities and it provides the provisions that how the accounting
of property, plant and equipment is being done before they are being entered in the balance sheet
(Exposure draft, 2017).

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The para 16(b) of the accounting standard IAS 16 Property, Plant and Equipment
provides that the cost of an item of the property, plant and equipment includes costs that is
directly incurred for bringing the assets to the location and any other condition necessary to
operate the asset as intended by the management. In this relation para 17 provides the examples
of cost that is directly attributable fort the cost of the item of property, plant and equipment. One
of the examples provided by the para 17 of IAS 16 provide the expenses occurred for the testing
on whether the assets will work properly after deducting any sales proceeds of goods that are
being manufactured during the testing phase. The changes are being introduced to solve the
problems that are being faced by two main industries, extractive and petrochemical industries.
On the basis of the committee recommendation it has been decided by the board to amend the
para 17 to prohibit the deduction of the sales proceeds from the goods produced during the
testing phase from the cost value of items of property, plant and equipment. Apparent to these
changes it has been decided to take the sales proceed to the profit and loss account and does not
reflect them in the balance sheet (Wahlen, Jones and Pagach, 2015). The proposed changes in the
accounting standard will make more clarity to the financial statements through making
recognizing of all the sales proceeds as income and take them to the profit and loss account as
and when they occur. Before making the proposed changes to the accounting standards it is
difficult for the user to have clear picture total revenue of an entity. It is because before the
changes have been suggested the sales proceeds of goods that are produced during the testing
phase are being adjusted to cost of property, plant and equipment. Before the proposed changes
have been introduced it is difficult to recognize the actual cost of an item of property, plant and
equipment (Exposure draft, 2017).

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So, it can be said that proposed changes to the accounting standard has prohibited the
deduction of sales proceeds of goods produced during the testing phase of an assets, before
bringing it to the place of intended use, from the cost of an item of property, plant and
equipment. On the contrary, the proposed exposure draft allows the sales proceeds of the goods
to the profit and loss account to bring more clarity to the recognition criteria of the revenue in the
books of accounts.
Evaluation of the exposure draft on whether it is being introduced in public interest or not
Public interest theory is being introduced for the well being of the society and to protect
their rights. As per this theory any rules or regulations that are being introduced must favor the
public at large not any small section of the society. The conceptual framework designed by the
IASB clearly suggests that accounting standards must be such that it works for the well being of
the societies through incorporating all such provisions in the accounting standards that are being
required for disclosing all the aspect of the financial reporting in front to the people. In this
regard IASB has decided to bring necessary changes in the IAS 16 Property, Plant and
Equipment for classifying the sales proceeds of goods, produced during the testing phase of
assets, in the profit and loss account as sales revenue. It bring more clarity for the accountant and
business entities all around the world to classify the sales of such goods in profit and loss
account and to satisfy the recognition criteria of sales revenue as prescribed by conceptual
framework. So it can be said that changes proposed by the IASB are in public interest and also
satisfy the public interest theory (Wiley IFRS, 2008).
Views presented in the comment letters in regards to agreement or disagreement with the
exposure draft

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The comment letters are invited from all over the world by the people who deal in the
respective accounting standard. The people can be accounting body, association of persons,
accounting associations, regulators, governing bodies or any other group who uses accounting
standard either to perform the accounting or to define the rules and regulation for the business
entities. Following are the four comments letters and their views on the proposed changes to the
accounting standard:
 Comment letter by CPA Malaysia: As per the answers provided to the questions asked in
the exposure draft it seems that CPA Malaysia agrees with the proposed changes in the
para 17 and para 20 of the accounting standard IAS 16. It further adds that the propose
changes will help to bring more clarity to the recognition of sales proceeds from the
goods that is being produced while carrying the testing of assets before it is being put to
intended use (Alexander & Archer, 2008).
 Comment Letter by Financial Reporting Council (FRC) of United Kingdom: On the basis
of reading of this comment letter is can be said that FRC was clearly against the proposed
changes in IAS 16 as it favor only particular group of people and there is no intended
definition of goods that can be recognised as sales proceeds in the profit and loss account.
The absence of definition can make business entities that belong to the particular industry
to recognize the sales proceeds from any type of goods in profit and loss account. As
such it violates the provisions related to the recognition of the sales revenue in book of
account.
 Comment letter by CPA Australia: As per the comments mentioned in the comment letter
by the CPA Australia it can be said that they are in favor of the proposed changes as
suggested by the exposure draft.

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 Comment Letter by CPA Ireland: On the basis of comments provided on the questions
asked in the exposure draft CPA Ireland disagree with the contestation of the IASB in
regard to take the sales proceeds from the sale of goods produced during the testing phase
to profit and loss account because it favor only some category of business entities
(Comment Letters, 2017).
‘For’ & ‘Against’ Opinions Derived From Comment letters
It can be stated from the overall analysis that 2 comment letters are in support of the
proposed changes in the accounting standards in relation to PPE as mentioned in the exposure
draft. However, two of the comment letters is against the changes proposed as it will particularly
favor specific business entities only (Christian & Lüdenbach, 2013).
Theoretical Framework Application
The theory of private interest can be applied to the comment letters as they have provided
the views and opinions of the participants by only placing emphasizes on the benefits of the
accounting standards only for some specific entities. However, the theory of public interest can
be applied to the comment letters that have analyzed the impact of the changes in the IAS 16 on
wide number of business entities (Camfferman & Zeff, 2007).
Conclusion
It can be stated form the report that the ASX companies need to make a sincere effort
towards the adoption of changes proposed by AASB in the accounting standards. This is required
for protecting the interests of investors by providing them complete and reliable financial
information.

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