Financial Accounting Report: Analysis of Advantage Oil and Gas - IFRS

This report provides an analysis of the financial accounting practices of Advantage Oil and Gas, focusing on the adoption of International Financial Reporting Standards (IFRS). It begins with an introduction to the company and the shift from Canadian GAAP to IFRS. The report identifies compliance issues in both qualitative and quantitative terms, examining the discrepancies and challenges related to IFRS implementation. It then investigates the impact of IFRS on key financial measures, including debt, profitability, and liquidity ratios, comparing pre- and post-IFRS adoption figures. The analysis reveals how IFRS affects the volatility of these ratios. Based on the findings, the report offers recommendations for addressing the identified issues, emphasizing the importance of understanding the differences between GAAP and IFRS when interpreting financial ratios. The conclusion summarizes the key findings and underscores the impact of IFRS on financial reporting and the need for careful analysis of financial statements.

Running head: INTRODUCTORY FINANCIAL ACCOUNTING
Introductory financial accounting
Name of the Student
Name of the University
Author Note

INTRODUCTORY FINANCIAL ACCOUNTING
Table of Contents
Introduction:...............................................................................................................................2
Discussion:.................................................................................................................................2
Identification of the compliance issues in qualitative and quantitative terms:..........................2
Examining the impact of accounting standards on financial measures:....................................3
Recommendation on the issues identified:.................................................................................4
Conclusion:................................................................................................................................4
References list:...........................................................................................................................6

INTRODUCTORY FINANCIAL ACCOUNTING
Introduction:
The report is prepared to apply the analysis of the financial accounting of one of the
companies of Canada. The accounting issues in relation to the accounting standard has been
identified along with determining the implication of their assessment has been demonstrated.
Advantage Oil and Gas is the chosen company for the analysis purpose which is an oil and
gas company with a focus on the significant position development in liquid resource and
natural gas located in Glacier region of Alberta. Canadian companies translated to IFRS on
January 1, 2011 and the financial information of the company has been restated from GAAP
of Canada to IFRS (De et al., 2016). Regarding this, the objective of preparing the report is to
qualitatively and quantitatively analyse the issues related to the accounting standard of IFRS.
Discussion:
Identification of the compliance issues in qualitative and quantitative terms:
The consolidated financial statements of Advantage Oil and Gas is prepared
according to the requirements of IFRS and certain items of the previous years have been
reclassified so that it conforms to the standard presently adopted. GAAP is responsible for
leaving a room for creative accounting misleading which is the concern of shareholders,
equity and venture capital investors. Sometimes, the organization uses fraudulent financial
reporting for creative accounting which is perceived to be an industry wide problem. The
preparation of financial statements under GAAP by Advantage Oil and Gas did not facilitate
the comparison with the peers of US. The company has adopted IFRS which requires the
management to make estimates and judgement in preparing the financial statements as the
financial conditions is materially impacted by such judgement (Advantageog.com, 2020).
While rules and guidelines formed the basis of preparation of financial statements under
GAAP and guidelines are offered by IFRS to facilitate comparing the financial information.

INTRODUCTORY FINANCIAL ACCOUNTING
Despite the claims made by the company about the compliance of their financial
report with that of IFRS, the compliance level under the standard is varying. There also exist
issue on part of auditor’s failure to form an opinion on the noncompliance and compliance
with IFRS. Furthermore, it has been ascertained from the assessment of several research
papers about the existence of significant level of noncompliance with the IFRS. From the
financial report of Advantage Oil and Gas, it is observed that the company has presented a
statement of compliance in a separate section that conforms the preparation of the financial
statements according to the requirements of IFRS. The outstanding and issued IFRS forms
the basis of the applicable accounting policies (Luchko & Melnyk, 2019).
Examining the impact of accounting standards on financial measures:
Various ratios reported under IFRS have experienced significant higher volatility as
revealed by the preliminary evidence of the early adopters in Canada. The impact on the
financial ratios due to the IFRS is attributable to the fundamental differences in terms of
application of consolidation and fair value accounting. The variations in the balance sheet or
the statement of the financial position due to the adjustments caused by the fair value
accounting impacts the leverage and liquidity ratios. In addition to this, recognition of any
unrealized loss or gains impacts the profitability and coverage ratios due to some
adjustments. Leverage and profitability ratios are affected directly due to the incorporation of
minority interest in equity. There are some ratios that are impacted inversely under Canadian
GAAP and IFRS. For instance, current ratio under liquidity analysis is higher when the
financial data is collected from the statements prepared according to IFRS (Oppong & Aga,
2019). This is because recognizing receivables and revenue is done earlier under the
accounting policy of IFRS.

INTRODUCTORY FINANCIAL ACCOUNTING
In order to determine the impact of IFRS on the financial measures, some debt ratios,
profitability ratios and liquidity ratios have been computed. Two ratios determining the debt
covenants of Advantage Oil and Gas has been determined that is interest coverage ratio and
debt covenant ratio. When looking at debt covenants ratios, it is observed that prior to the
adoption of IFRS, debt ratio of company increased from 0.12 in year 2011 to 0.16 in year
2019. In year 2010, debt ratio were recorded at 0.15 that is when the company followed
Canadian GAAP. Interest coverage ratio on the other hand increased considerably to 17.79 in
year 2017 as against 2.72 when the company followed GAAP.
Return on equity of Advantage Oil and Gas has kept on fluctuating prior and after the
adoption of IFRS. However, the return on equity after the adoption of IFRS has fallen and is
negative implying that the money of shareholders are not utilized effectively by the company
to generate profit. Profit margin has also observed downward trend after adoption. However,
prior to the adoption, profit margin was negative in year 2011 implying that the expenses of
the company has not been managed effectively.
Recommendation on the issues identified:
It is not wise to compare the financial ratios figures based on GAAP and IFRS and it
is required to identify the difference between the reported changes in the performance after
transition to IFRS. It is required by the organization adapting to IFRS and also aligning to
GAAP to take steps to address the misleading trend analysis and impairing the comparability
(Dowa et al., 2017). Ratios are impacted in different manners under both Canadian GAAP
and IFRS.

INTRODUCTORY FINANCIAL ACCOUNTING
Conclusion:
A number of specific characteristics of affected by IFRS which differentiates from the
GAAP. There exist a changing degree of subjectivity due to greater degree of reliance on the
fair value accounting under IFRS. The reason for difference in the figures of financial ratios
of Advantage Oil and Gas and other financial measures is attributable to the essential
difference in the application of consolidation and fair value accounting under pre changeover
of GAAP and IFRS. Nevertheless, an increased or decreased volatility of the financial ratios
under GAAP is not clear. The transition of IFRS from Canadian GAAP identified numerous
changes ranging from the application of accounting policies to the financial position.

INTRODUCTORY FINANCIAL ACCOUNTING
References list:
Advantageog.com. (2020). Retrieved 12 March 2020, from http://www.advantageog.com/wp-
content/uploads/2020/02/2019-FS-audit-report-included.pdf
De George, E. T., Li, X., & Shivakumar, L. (2016). A review of the IFRS adoption
literature. Review of Accounting Studies, 21(3), 898-1004.
Dowa, A., Elgammi, A. M., Elhatab, A., & Mutat, H. A. (2017). Main worldwide cultural
obstacles on adopting international financial reporting standards (IFRS). International
Journal of Economics and Finance, 9(2), 172-179.
Gaikwad, N. S. (2020). Benefits & Challenges of Adoption of IFRS. Our Heritage, 68(25),
219-223.
Luchko, M., & Melnyk, N. (2019). IFRS-reporting: practical aspects of transition. Herald of
Ternopil National Economic University, (4 (94)), 42-53.
Oppong, C., & Aga, M. (2019). Economic growth in European Union: does IFRS mandatory
adoption matter?. International Journal of Emerging Markets.