HI6025 Group Report: Australia and Denmark IFRS Adoption Analysis

This report provides a comparative analysis of the adoption of International Financial Reporting Standards (IFRS) between Australia and Denmark. It begins with an introduction to Positive Accounting Theory, IFRS, and financial reporting. The report then highlights the importance of Positive Accounting Theory in predicting firm behavior and the impact of accounting standards. A detailed comparison between Australia and Denmark is presented, covering the history, reasons for adoption, transitional issues, and the challenges encountered during and after IFRS implementation. The report also explores the benefits of adopting IFRS and identifies similarities and differences in the adoption processes of both countries. Finally, the report concludes with recommendations for the accounting bodies in both countries, offering insights into improving the effectiveness of IFRS implementation and financial reporting practices.

Running head: ACCOUNTING THEORIES AND CURRENT ISSUES
Accounting Theory and Current Issues
Name of the Student
Name of the University
Author Note

1ACCOUNTING THEORY AND CURRENT ISSUES
Abstract
The following report contains a comparative analysis of the adoption of IFRS between Australia
and Denmark. It begins with an introduction of the concepts discussed in the report like Positive
Accounting Theory, IFRS and financial reporting. After which, it proceeds to suggest the
importance of Positive Accounting Theory. It then moves on to conduct a comparative analysis
between Australia and Denmark. Various aspects like the history, reasons for adoption,
transitional issues and the challenges faced in adopting IFRS are all discussed. After which, the
report ends with an overview and recommendations made to the accounting bodies of both the
countries.

2ACCOUNTING THEORY AND CURRENT ISSUES
Table of Contents
Abstract........................................................................................................................................1
Introduction..................................................................................................................................3
Relevance of Positive Accounting Theory for Financial Reporting............................................3
Comparison between Australia and Denmark in implementing IFRS............................................4
Reasons for Adoption...................................................................................................................4
Transitional issues faced by the countries....................................................................................5
Challenges faced after adopting IFRS.........................................................................................6
Benefits of Adopting IFRS by entities.........................................................................................7
Similarities and Differences in adopting IFRS............................................................................8
Success in Adopting IFRS...........................................................................................................8
Recommendations and Conclusion..............................................................................................9
References..................................................................................................................................10

3ACCOUNTING THEORY AND CURRENT ISSUES
Introduction
Positive Accounting Theory is a field of accounting which deals with the prediction of
the choices that will be made by the firms like new accounting policies and the impact of new
accounting standards on a firm. The major relevance of this theory is in predicting the activities
of a firm as it recognises that economic consequences exist in relation to the activities of a firm.
International Financial Reporting Standards (IFRS) are the accounting standards issued by the
International Accounting Standards Board (IASB) in collaboration with the IFRS foundation. It
also deals with the preparation of the conceptual framework for accounting necessary for
financial reporting. One of the earliest adopters of the IFRS framework is the European Union.
Denmark is one of the countries adopting IFRS as a part of its reporting standards. This is also
the case with Australia, which is trying to adopt IFRS as a part of its business reporting
framework. The core benefit of this framework is that it allows the nations to converge their
reporting standards with the Global Reporting Standards and improves the comparability of
financial statements. The common problems faced by the countries in the implementation of
IFRS can be classified as transitional problems and the challenges faced after adopting the
standards. The success of the level of implementation can be determined on the basis of the
extent to which IFRS has become a part of the reporting standards of the entities. However,
there is scope for improvement in making IFRS more pertinent to all the users of the financial
statements.
Relevance of Positive Accounting Theory for Financial Reporting
Financial Statements are one of the major aspects of the modern day business in terms of
vitality. This is because they communicate information related to the financial health of an
organisation and its performance over a specified time period. These statements are the only
means through which a business can communicate the necessary financial information in a
comprehensive manner. However, there are certain choices to be made in the preparing the
financial statements. One of them is the selection of the accounting policies that will be used by
the entity. The option of selecting different accounting policies arises because of the
contradictions which exist in some of the financial concepts. Positive accounting theory helps
understand the choices made by the companies in selecting the accounting policies, the reaction
of the investors to the change in these accounting policies and the changes in the financial results

4ACCOUNTING THEORY AND CURRENT ISSUES
of the entity due to the same (Alayemi 2015). Hence, Positive Accounting Theory is an
important consideration in a business before adopting a particular policy in financial reporting.
Researchers suggest that one of the main reasons behind the emergence of Positive Accounting
Theory is the inability of the current accounting practices to fully explain the accounting exercise
to the consumers and other stakeholders of the business. One such example is the Efficient
Market Hypothesis (EMH). This hypothesis suggests that the information available to all the
investors is the same and hence, the stock prices in the markets are a fair reflection of the market
conditions. It says that investors should react only to information which affects the cash flows of
the companies. However, major corporate organisations continue to lobby with accounting
bodies like FASB and IASB to change accounting policies which do not just have an effect on
the cash flows of the entity. This suggests that all kinds of accounting policies have an impact on
the results of the company (Schroeder, Clark and Cathey 2019). In general, the positive
accounting theory deals with three management hypotheses. These are namely the bonus
program hypothesis, the debt covenant hypothesis and the political cost hypothesis. Researchers
suggest that managers who have to deal with a bonus plan often tend to choose accounting
procedures which tend to show changes in the reported earnings of the entities from future
periods to current periods (Muliya and Hasibuan 2018). The political cost hypothesis proposes
that even though large scale organisations have the ability to manipulate the political process in
terms of tax planning, they do not do so. This is to avoid drawing the attention of the regulators
towards themselves. Instead of that, they tend to pick an accounting policy which automatically
reduces their tax liability for a particular year. The tax aggressiveness of the companies increases
with the increase in the profits earned by them (Gunawan and Resitarini 2019 November).
Hence, companies are acutely aware of the impact of their actions on their future prospects. This
also includes their choice of accounting policies. It has been stated that Positive Accounting
Theory is extremely relevant in these situations.
Comparison between Australia and Denmark in implementing IFRS
Reasons for Adoption
In Australia, the Australian Financial Reporting Council adopted IFRS in 2002. However,
it came into effect for the financial periods beginning from 1 January 2005. It is suggested that
the timing at which IFRS was adopted was an expected one, especially to the members of the

5ACCOUNTING THEORY AND CURRENT ISSUES
Australian Accounting Standards Board (AASB). One of the main reasons behind the adoption
of IFRS in Australia was the adoption of the same by the European Union and the convergence
efforts undertaken by the United States. Increasing globalisation necessitated the accounting
standards to be at par with the accounting practices and accounting regulations followed
worldwide. As one of the liaison national standard setters of the IASB, the AASB worked in
several projects related to the extractive industries, intangibles and joint ventures. The change in
the trade policies of the government encouraged more liberalisation and free-trade practices. This
also necessitated the adoption of International Accounting Standards as a part of the accounting
framework of the country. The Australian Stock Exchange and its representatives were amongst
the members who encouraged the adoption of the IFRS (Chapple 2018).
In Denmark, the FSR – Danke Revisorer (FSR) (The Institute of Public Accountants in
Denmark) is the body responsible for setting up the accounting standards. This body established
the Danish Accounting Standards Committee (DASC) to issue the relevant guidelines in the
preparation of the financial statements. Since 2004, this committee has been active in analysing
and preparing the comments on exposure drafts, technical standards and discussion papers
received from the IASB and EFRAG. Being a member of the European Union (EU), Denmark
became subject to the IAS guidelines since 2002. The EU IAS regulations had to be adopted by
the companies trading in the Stock Exchanges from 2005 (André 2017). It applies to all the
publicly traded companies other than banks. Some of the reasons behind the influence of foreign
reporting on the reporting practices of Denmark are the size, geographical location and the
cultural and economic factors of the country. Its links with the United Kingdom have also
resulted in the country following the Anglo-Saxon accounting tradition with flexible reporting
regulations. Although the country has also been influenced by the US accounting practices, this
influence has not been as strong as the influence of the UK (Aei.pitt.edu. 2020).
Transitional issues faced by the countries
One of the major transition issues faced by any country in adopting a new set of
accounting standards is the errors caused due to the inexperience in using IFRS previously. It has
been found that the late adopters of IFRS tend to commit fewer errors than the late adopters. In
Australia, before the adoption of IFRS, firms were required to follow the guidelines of AASB
1047. The firms were required to provide a reconciliation of the GAAP earnings into the IFRS

6ACCOUNTING THEORY AND CURRENT ISSUES
earnings. In the initial year of adoption, the same thing was required to be done by the firms as
per the requirements of IFRS 1. Due to this policy, the transition year earnings of the entities
were reported twice. They were first reported in the year of transition and then again in the year
of adoption. The double reporting was used in showing the errors committed by the firms in the
year of transition. These errors tend to play a chief role in highlighting the credibility of the new
financial reporting processes in the firms implementing them. Another aspect which played an
important role in the increased errors in implementation is the increased audit fees due to the
changes in the requirements of the regulations (Loyeung et al. 2016).
One of the issues faced in Denmark is the presence of two accounting bodies namely The
Institute of State Authorised Public Accountants and the Institute of Registered Accountants. The
State Authorised Accountants tend to audit the state owned corporations of the country. Whereas
the companies which adopted IFRS were audited by the ‘Big Four’ companies Due to this
switch, the listed companies and the auditing entities faced significant challenges in training the
staff and making them ready for using IFRS. One such transitional challenge was in the area of
financial instruments where the staff had to keep a track of the fair values of the financial
instruments and the derivatives. Making the management and employees think from the
perspective of embedding IFRS was a significant challenge. Performing high level audits with a
short span of training was a major challenge faced by the auditors. Translating the IFRS
standards into Danish from English was another challenge faced by the entities (Holm 2008).
Challenges faced after adopting IFRS
After the adoption of IFRS, Australia continued to face some challenges which were not
previously a part of the problems caused due to the accounting regime prevalent in the country.
One of those areas which was required to be recognised in the financial statements was
intangibles. It has been proven by many researchers that the market value of a firm and the value
of intangibles in its books are strongly related to each other. Prior to the adoption of IFRS,
Australia had its own set of regulations to monitor the accounting related to intangibles. They
were AASB 1011 Accounting for Research and Development Costs and AASB 1013 Accounting
for Goodwill. The AASB also planned to develop accounting standards which covered a wide
range of intangible assets. The adoption of the IFRS led to the adoption of accounting standards
like IFRS 3 and IFRS 138. These standards were more conservative in nature and only externally

7ACCOUNTING THEORY AND CURRENT ISSUES
purchased goodwill and other intangibles can be capitalised. However, the valuation of the
goodwill and other intangibles depended on the discretion of the managers conducting them.
Despite increasing calls for the recognition of more intangibles, the conservative approach
prevailed in recognising the intangibles. The adoption of IFRS failed to improve the quality of
financial information and has resulted in the decline in the value relevance of intangibles (Ji and
Lu 2014).
One of the challenges that the firms in Denmark faced after the implementation of IFRS
as a part of the reporting practices is the cost factor. The complexities involved in the mechanism
of IFRS makes it difficult for firms of all sizes to undertake and consistently implement the
system. Since 2002, the Danish Accounting Standards were not updated by the Accounting
Board because of the mandatory implementation of IFRS in case of most of the entities. This
caused significant challenges to the smaller firms in adopting their reporting practices according
to the changes occurring in the business environment (Iasplus.com 2020). After the
implementation, most of the EU nations faced a similar set of problems in implementing IFRS.
They included the measurement of the relevant outcomes from the accounting practices. It
became difficult to rate the financial statements on different aspects like relevance, materiality,
comparability and verifiability even after the adoption of IFRS. The powers of the existing
accounting bodies declined as most of the countries had to set up a new accounting body
responsible for ensuring the compliance with IFRS (Habrmanová and Lautala 2015).
Benefits of Adopting IFRS by entities
One of the main benefits of adopting IFRS in Australia was that it was a major change by
the accounting standard setters. Hence, the firms adopting it early could prepare their reports in a
globally acceptable manner. Initially, the adoption of IFRS in Australia was not mandatory.
Hence, the issues of self-selection were minimum for the entities and hence, they could choose
the accounting policies as per their convenience. Despite the adoption of IFRS, there were not
many changes in the reporting environment prevailing in the country. Hence, the reporting
practices could be undertaken at a global scale without making major changes to the reporting
processes. Before the implementation of the IFRS standards, Australian firms tended to be less
involved in earnings management through techniques like income smoothing and value

8ACCOUNTING THEORY AND CURRENT ISSUES
relevance of accounting information. However, the firms became better in this regard after the
implementation of IFRS in their reporting practices (Jaweher and Mounira 2014).
It has been noted that to fully realise the benefits of adopting IFRS, their implementation
needs to take place on a global scale and in a more voluntary manner. However, some of the
benefits that were perceived to have been received by the firms were better measurement of
cross-border transactions, enhanced information sharing and increased transparency in the
financial reports, better comparability between the financial reports of firms and lower costs of
capital due to the better financial information communicated by the financial statements of the
entities (Ball 2016). While these benefits are yet to be fully realised, they have been quite
successful in Denmark. The country is also considering implementing them as a part of the
reporting practices of the SMEs (Kaya and Koch 2015).
Similarities and Differences in adopting IFRS
On the basis of the above discussions, there are a few similarities that can be observed
between both the countries in adopting IFRS. One of them is that both the countries were one of
the earliest adopters of IFRS. They adopted the accounting practices since they were first
introduced in 2002. The major reason for both the countries to implement IFRS is to make their
reporting practices on par with the globally accepted accounting practices. They also intended to
make the financial reporting more transparent and acceptable on a global scale. The Accounting
bodies of both the countries played an important role in reviewing the documents of IASB and
helping it make them better and more relevant on a global scale. The transitional issues faced by
both the countries were also similar. However, there also exist a few differences between both
the countries. While Denmark had to face translation issues at the time of introduction of IFRS,
Australia did not have any such issues. The guidelines of AASB resulted in the country
presenting the impact of IFRS implementation twice during the adoption of IFRS. This resulted
in doubts about the validity of IFRS in Australia initially. However, the transition process in
Denmark was much smoother due to the influence of the UK based accounting system on it. One
of the major challenges faced by both the countries with respect to the adoption of the IFRS is
the timely training of staff and managing the costs involved in implementing it. The value
relevance of the entities in Australia has been low because of the reluctance of the firms in
giving up conservative accounting practices.

9ACCOUNTING THEORY AND CURRENT ISSUES
Success in Adopting IFRS
It can be suggested that the quality of accounting in Australia has not drastically
improved since the adoption of IFRS. One of the reasons for the same is the mandatory adoption
of the accounting practices in the country and a lack of significant change in the accounting
environment prevalent in the country. However, with time, there has been an improvement in the
level of expertise of the audit committees. This has resulted in better earnings management and
quality of accruals under IFRS. However, adequate support from both the governing bodies and
the law enforcement is also essential for a greater impact of IFRS on the financial performance
of the entities (Bryce, Ali and Mather 2015). In Denmark, IFRS can be said to be a success of a
high level due to the extent of implementation and the level of endorsement given to IFRS by the
accounting body. Similarly, the country is also trying to converge its accounting practices with
that of the US GAAP and hence, it can be suggested that the implementation of IFRS has been
more effective due to the support by the relevant authorities. The future scope for developing the
reporting practices are also much better.
Recommendations and Conclusion
Based on the above discussion, it can be said that the level of success in adopting IFRS in
both the countries has been varying. As suggested by the Positive Accounting Theory, the impact
of the adoption of the accounting principles can be suggested as a possible reason for the same.
The AASB should focus on making the Accounting Standards issued by it to be more in
agreement with the IFRS standards. Similarly, the focus should be laid on simplifying the
valuation methods undertaken by the responsible parties to ensure that the information and
valuation related to a firm becomes more accessible to the users. The Denmark Accounting
Board should undertake stricter measures to ensure that firms do not exploit the IFRS to benefit
themselves in an unethical manner. It should be made mandatory for all classes of firms and not
just some selected firms. This ensures uniformity in the accounting practices and improves the
comparability of financial statements. It also makes the results communicated by the financial
statements more understandable to all sections of the users, irrespective of their level of
knowledge about financial reporting.

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11ACCOUNTING THEORY AND CURRENT ISSUES
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