International Accounting Standards: Australia's IFRS Adoption Analysis

This report provides a comprehensive analysis of the adoption of International Financial Reporting Standards (IFRS) in Australia. It examines the significant changes in accounting standards following the implementation of IFRS post-2005, highlighting the benefits such as increased transparency and comparability, and the disadvantages, including the loss of Australian GAAP procedures and the need for extensive training. The report uses the Wesfarmers annual report as a case study to illustrate the practical implications of IFRS adoption, detailing changes in financial statement presentation, accounting policies for financial instruments, and the impact on key financial metrics. The analysis also references academic articles to support the findings, concluding that IFRS adoption has enhanced the quality of financial reporting, benefiting investors and shareholders by providing more reliable and useful data. The report also includes a discussion on the impact of IFRS on various aspects of accounting, including earnings management and timely loss recognition.

ACCOUNTING THEORY
& CURRENT ISSUES
ASSIGNMENT

1
By student name
Professor
University
Date: 20 May 2018.
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Executive Summary
A detailed analysis and a report has been prepared, for the changes that have evolved with the
implication of the International Accounting Standards and IFRS post 2005. The report has
focused on the application of the International accounting reform in Australia, the changes in
reporting and accounting, its importance, the issues being faced by the accountants. The report
reflects that the accuracy level of the financial statements line items and shareholders have been
benefitted. This has been analysed with the help of the annual report of the company Wesfarmers
for the 2 period, one before 31st Dec 2005 and another one post 31st Dec 2005. The study has also
been gone through using one of the article named “Changes in value relevance of accounting
information upon IFRS adoption: Evidence from Australia” issued in Australian Journal of
Management by Chalmers, K., Clinch, G., & Godfrey, J. M.
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CONTENTS:
Introduction...........…………………………………………………………………..........…...4
Analysis.......................………………........................................................................................5
Changes in Accounting Standards................................................................................5
Benefits and disadvantages of adoption of International Accounting Practices…..5
Other aspects and implication………………………………………………………...6
Changes in the annual report of the company……………………………………….7
Conclusion.......................………………...................................................................................10
References......................……………….....................................................................................11
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Introduction
The introduction of International financial reporting standards (IFRS) have led to a great change
in the format of reporting and how the company is carrying on the general accounting. It had an
influence on the equity, assets, liabilities and income of the entities in Australia. The application
of the IFRS was a difficult task which engaged large variations among the reporting as per
country specific accounting standards and the IFRS which was being applied worldwide
(Bromwich & Scapens, 2016). Australia was among the first countries to take up the IFRS
accounting and a lot of businesses got influenced because of this. There were many arguments as
it would lead to big modifications in the entities financial performance and quality of reporting
as there were huge differences in AASB and IFRS standards. IFRS is mandatory to all the
reporting entities, which is inclusive of listed companies and other financial institutions. It
changed the perspective of accounting in terms of quality with respect to earnings management,
value relevance and timely loss recognition. It helps in minimising costs for the users of financial
statements and the auditors, and will result in enhancing efficiency and curtailing the costs.
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Analysis:
Changes in Accounting Standards
IFRS was introduced in Australia post 01st January 2005. AASB 132 which was based on
financial instruments: Disclosure and Presentation introduced a more stringent definition of the
equity and thereby certain preference shares and hybrid instruments which were earlier classified
as equity were now reclassified as liabilities (Belton, 2017). As per AASB 139 on derivative
instruments and hedge accounting, all the derivative instruments shall be measured at fair value
and also be recognised on the balance sheet. Likewise, AASB 139, on financial instruments,
recognition and measurement also laid down strict requirements for the companies requiring
them to bring back the financial assets such as the mortgages that have been securitised in the
past and have been derecognised from the balance sheet. With the introduction of IFRS,
provisions for impairment was to be reported as per AASB 139 instead of AASB 1044 which
was being followed before (Alexander, 2016).
Benefits and disadvantages of adoption of International Accounting practices
The IFRS changes were applicable for all the entities. The advantages of IFRS in Australia are:
1. Because of uniformity in accounting and reporting, it assists in attracting capital to
Australia.
2. Minimal costs for the preparers and the auditors and will result in enhancing efficiency
and curtailing the costs.
3. Improve transparency in accounting, reporting and disclosures will assist in upgrading the
quality of the financial statements like verifiability and reliability of the financial
statements (Das, 2017).
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The disadvantages of implementing the IFRS standards in Australia were:
1. Loss of the Australian GAAP procedures and guideline on employee benefit accounting.
2. Implementing new accounting procedure.
3. The accountants need to be trained for which huge time, costs and effort involved.
4. Compromising the comparability of the financial statements (Chron, 2017).
Differences between the AGAAP and the IFRS are below:
1. IFRS is more comprehensive and detailed cum verifiable as compared to AGGAP with
respect to the financial instruments, recognition, measurement and disclosure and the
post-employment benefits, this would align Australia with the International standards.
2. It is also more comprehensive in terms of insurance company accounting, extractive
activities and intangible assets (Félix, 2017).
3. It changed the perspective of accounting in terms of quality with respect to earnings
management, value relevance and timely loss recognition.
Other aspects and implications
With the adoption of International standards, the competitiveness has increased on the global
front as well as paced up the economy (Dichev, 2017). It has removed restrictions to the
international capital flows and enhanced comparability of the financial reports. It also brought
about an upgradation in accounting as there were many areas where the Australian Accounting
Standard was not available like IAS 38 and IAS 39 and those which existed were dispensable
and no more useful in terms of end users like AAS 27, 29 and 31 which were replaced by AASB
1022 and 1023. It resulted in increasing the liabilities, decreasing the equity and maximum firms
had decrease in earnings than the increases (Farmer, 2018). Various studies were conducted to
see, how International Standards in Australia has brought about effective accounting practices
and leveraged the global market. However, IFRS proved to be more comprehensive with respect
to the accounting of insurance companies and intangible assets as well. The launch of IFRS
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technique gives a momentum for accounting individuals, to make prototype move in the way of
educating and also gives advice towards the system of accounts teaching, that is free from the
specifics of standards released by the regulators.
Changes in the annual report of the company
Underneath, an example has been taken considering one of the pioneer companies in Australia,
the Wesfarmers, headquartered in Perth. The company deals in Australia, New Zealand,
Bangladesh, Ireland and United Kingdom. It is the largest employer in Australia employing more
than 220000 employees. It is the largest company in Australia in terms of revenue and has a
history of more than 100 years (Kuhn & Morris, 2016).
In case the financial statements of both the years 2005 and 2006 are being analysed we can find
significant differences in the same. One of these is showing the statement of changes in equity
separately besides cash flow statement, balance sheet and profit and loss account. Previously it
was just being shown as notes to accounts in which the reconciliation was given.
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Now the company is having separate disclosure in the significant accounting policies on what are
the major compliances like adoption and compliance of IFRS. The company has also disclosed
that the financial statements have been restated to ensure comparability for the adoption of
AASB 1023, 139 and 132 (Heminway, 2017). The company has adopted for the 1st time
measurement of the financial assets held till maturity, loans and receivables, fair value
measurement and also the derivatives at fair value, hedging gains and losses, etc. The company
has also reinstated the retained earnings to comply with the latest standards and since it was
practically impossible to reflect the same in the financial statements, therefore the company has
ignored the same.
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From the above extract, it can be noted that the company for the first time has applied AASB
standards and accounting policies for measuring the derivative financial instruments and hedging
applicable to the company (Goldmann, 2016). It mentions that the group uses financial
instruments like forward currency contracts and interest rate swaps for hedging the risks
associated with forex and fluctuations in the interest rate. These derivative financial instruments
are measured at the fair value and in case positive, it is recognised as asset and in case of
negative, these are recognised as liability in the balance sheet. Any gains or losses in the fair
value are directly being reported in the profit and loss account (Kangarluie & Aalizadeh, 2017).
For the purpose of derivative, accounting hedges are being classified into three categories,
namely fair value hedges, the cash flow hedges and the net investment hedges based on the
criteria they fulfil. The company has also shown in the disclosures the accounting policies
applicable for these hedges from 30th June 2005.
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With regards to the impairment of the financial items, the company had adopted AASB 132 and
AASB 139, the accounting policies for which have also been stated. It shows that all the
financial assets would be assessed at each balance sheet date for impairment, be it financial
assets being carried at amortized cost or cost or available for sale investments (Sithole, Chandler,
Abeysekera, & Paas, 2017). It also mentions that the impairment accounting policy shall apply to
both the current as well as the non-current financial assets. The company has also made a change
in the policy for the trade payables wherein they will be carried at amortised cost as per AASB
132 and AASB 139 going forward from 30th June 2006 whereas in 2005 the same was being
recognised at cost. Likewise, for the interest bearing loans and borrowings, the initial recognition
would be at fair value less the transaction and related costs in the beginning from 2006 onwards.
Whilst, in the present scenario, the same is being recognised at the principal value in the
financial statements. These are few of the major changes that can be seen in the annual report of
the company post 2005 as compared to what was being reported prior to that (Choy, 2018).
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Conclusion
With the help of above discussion, it can be said that by adopting the International Accounting
Standards (IAS) in place of the local GAAP by Australia was one of the best resolution in its
accounting background as it led them in parity with the international reporting and accounting.
This has enhanced the quality of the reporting that was earlier not there in the Australian GAAP
and the amendment of those backdated standards. Due to uniformity in accounting and reporting,
it assists in attracting capital to Australia. It has increased the quality, reporting like valuation,
the presentation of the financial instruments, the disclosure requirements and sustainability and
corporate governance accounting. Australia enjoyed the advantage of international financial
reporting standards that comes in parity with global standards and paving the way of the
Australian economy for the foreign investments and capital, marking its contribution in the
economy. It changed the perspective of accounting in terms of quality with respect to earnings
management, value relevance and timely loss recognition. It has been profitable for investors and
shareholders, by providing them useful and trustworthy data which meets the qualitative
attributes of the financial statements more comprehensively than the previous standards.
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