Compliance with IFRS Standards
What Is The Development In Accounting Thoughts Current?
The present report is developed to examine and analyze the current accounting issues from the perspective of a senior accountant who have been provided with the responsibility by CEO to provide her with a deeper theoretical understanding of the accounting issues discussed in a recent article. Also, the senior partner of the firm has provided the role of reviewing the upcoming accounting standards and the opinions of other industry players in relation to it. As such, the report analyses a current exposure draft developed recently for proposing accounting standard changes and reviewing the comment letters developed for its purpose.
The article selected for the analysis purpose is ‘IFRS quarterly newsletter’ for providing a global insight into the recent developments in the international financial reporting standards and their impact on the business entities operating within Australia. This is because the changes in the international accounting standards have a direct impact on the financial reporting process of business entities within Australia. IASB (International Accounting Standards Board) have undertaken the role of development the International Financial Reporting Standards (IFRS) to be adopted by the business corporations across the world (Gwan, 2018). The compliance with IFRS is proposed by IASB in order to maintain uniformity in the financial reporting to make the financial information more comparable and understandable by the investors worldwide. This is done mainly to improve the quality of financial reporting and for meeting effectively the different needs and expectations of the global investors (Wasieleski & Weber, 2017).
Australian accounting Standards Board (AASB) has also directed the business entities to comply with the IFRS standards for seeking the attention of the global investors. This in turn will promote the growth and development of business entities operating within Australia by gaining funds from the global investors. The adoption of IFRS standards tends to improve the transparency in the financial reporting process with its conceptual accounting framework principles. The accounting framework mandates the business entities complying with IFRS to develop the financial statement having the characteristics of reliability, faithful presentation, comparability, understandability, verifiability and timeliness. The qualitative characteristics have been developed on the basis of normative accounting theory that has provided the theoretical knowledge in relation to the standard accounting processes and policies. The theory is based on the value judgments and moral principles that need to be present within the accounting policies for protecting the interest of end-users. Thus, the Australian business entities by adopting the IFRS standards will also tend to comply with the conceptual accounting framework and thereby improving the integrity in the financial reporting (Riahi-Belkaoui, 2004).
Changes to IFRS 9 and IFRS 15
The article in this context has stated that the changes in the IFRS will have a direct impact on financial reporting process of Australian corporations. The changes that are discussed in the article are about the two major new accounting standards that have come into effect from January 2018. The standards are IFRS 9 relating to financial instruments and IFRS 15 relating to revenue from contracts with customers. The significant change in these international accounting standards need also to be complied by AASB and therefore have to reform its financial reporting system as per the new proposed standards. The Australian business corporations tend to develop their accounting policies and guidelines as per the new standards to comply with the IFRS standards changes. The standard has included the requirements of recognition, measurement, impairment, de-recognition and general hedge accounting to be disclosed in the financial reports for the financial instruments. In this context, the recent changes in the IFRS 9 is relating to the significant changes in the financial reporting process for loan losses to meet the interests of end-users (IFRS, 2018).
The changes in the IFRS 15 is relating to disclosing more information about the process of revenue recognition in the financial statements. It is expected from the companies to identify and recognize the revenue on the basis of the contract the entity has with the customers and identifying the transaction price. There is wide impact of the IFRS 15 standard on the construction companies as it requires the entities to provide detailed information on contract costs and expenditures made for fulfilling the contract. This requires the business companies to review their revenge recognition practices and implement the necessary changes by reviewing their contract practices for complying with the new regulations (Gwan, 2018).
Therefore, the Australian business entities need to review the practices of revenue recognition and measurement of financial instruments to comply with the changes in IFRS. This may be quite challenging task for the business companies as they need to completely review the accounting systems and processes. This would require significant expenditure for the companies as they have to develop an action plan for implementing the required changes. The action plan consists of identifying, measuring and implementing the proposed changes in the accounting processes so that it can comply with the international standards. Thus, it requires significant funds required the hiring of skilled accounting professionals that can increase the operating expenses of the company. Besides financial resources the successful implementation of the proposed changes would also require consumption of time and thus can distract the managers from focusing on the core business areas. The business entities need to overcome all these significant challenges for meeting the wide interests of the global investors and ensuring their sustainable growth and development by continually seeking funds. The wide number of complexities and challenges associated with complying changes of IFRS standards is restricting the business entities to implement them (Ordelheide, 2016).
Challenges in Implementing Changes to IFRS Standards
As such, it has been reported by ASIC (Australian Securities Investment corporation) that only few number of entities listed on ASX are complying with the required changes proposed by IASB in the accounting standards. There is no disclosure made by large Australian corporations at present about the impact on their financial reporting process as per the new recommended standards. This can be regarded as major issue of concern for the companies as it can negatively impact their attractiveness to the global investors. The global investors on receiving the information about the changes in the accounting standards tend to examine the financial results in accordance with the changes. As such, the absence of disclosures reading the significant changes can cause ambiguousness in the mind of investors that can impact their decision regarding investment in the business corporations of Australia. As such, the limited availability of funds from the global investors can reduce the chances of potential growth and success in the long-term. Therefore, it is recommended to the business companies operating within Australia to develop effective strategies and systems for complying with the proposed AASB changes (Parker, 2013).
The article has also discussed the changes that can occur due to the decision of UK to exit for the European Union. It has been stated in the article that exit of the UK from EU would cause changes in the financial reporting of taxes by the entities. IASB at present is engaged in developing proposals for implementing changes in the reporting of tax information to meet the interests of the end-users. The significant changes implemented by IASB for reporting the tax issues could result in causing the respective changes within the Australian financial reporting environment also for complying with the international standards. The business entities within Australia also need to comply with new standards of leases proposed by IFRS 16 that will also increase the complexity in the financial reporting process of business entities. The new standard requires reporting more information about the leases on the balance sheet in comparison to that stated by the present accounting standards. Thus, it can be said that the changes in IFRS is causing the significant changes in AASB standards that will significantly improve the quality of financial reports developed by Australian business corporations. However, they also need to implement effective accounting systems and processes for overcoming all the challenges associated with their adoption (Gwan, 2018).
Impact of Brexi on Financial Reporting of Taxes
Exposure draft refers to the changes that are proposed by the accounting boards or regulators to make changes in the relevant accounting standard. The purpose of exposure draft is to put the proposed changes in front of the public for open invitation to comment on the exposure draft. The comment provided in the letters can be against or in favor of the exposure draft. Comments letters are generally given by accounting bodies, accounting professionals, accounting regulators and other individuals who uses accounting standard for the purpose of financial reporting. In this segment of the report the current exposure draft on the proposed changes to the accounting standard IAS 16: Property, Plant and Equipment (Exposure draft, 2017).
The exposure draft that has been selected for the report purpose is given on the IASB portal and it is related to changes that have been proposed in the accounting standard IAS 16 which is related to the accounting of property, plant and equipment. This exposure draft is provided on the web portal of IASB in June 2017 and comment letters are invited on the same till 19 October, 2017. The International Board of Accounting Standards has received many requests from many business entities and accounting professionals to make some changes in the IAS 16 so that they represents the financial statements in more precise manner. The industries involved in mining and pharmaceuticals sector are facing problem in accounting of sales of goods that are produced during the testing phase of assets before they are actually put for intended use. As per the existing provisions of the accounting standard IAS 16 (Para 16), cost of item of property, plant and equipment must include all the expenses that are incurred to bring the assets to the place of actual use as intended by the management (Exposure draft, 2017). In this regard the para 17, provide various examples of the cost that has to be included in the value of assets before they are put to use. Among these examples the one is testing expenses that have been occurred to test the assets in order to check whether they are fit for the production or not. Many of the business entities have no issues to add the cost of testing in the total value of item of property, plant and equipment but they argues on the treatment of the sales proceeds from the goods produced during the testing phase. As per para 20 of the IAS 16, sales proceeds from the goods produced during the testing phase of assets before they are put to actual use must be subtracted from the cost of assets. Many of the business entities have argued that treatment of sales of goods as a cost of assets as it violates the principle for recognition of revenue in the books of account. The board committee has taken all the concerns of all the affected business entities and decided to amend the respective para of the accounting standard IAS 16 (Wiley IFRS, 2008).
Compliance with New Leases Standards
The changes in the accounting standard IAS 16 has been done mainly to address the issues faced by the two main industry sector, namely extractive and petrochemical industries. The committee has reviewed the changes that has been reported by the various entities and provided the board proposal to change the respective para of the IAS 16. The changes has been incorporates in the exposure draft and it has been publically open to invite the comments on the relevance of changes in this accounting standard (Epstein & Jermakowicz, 2008).
Para 17 of the IAS 16, has been amended to provide the certain changes in accounting of the sales proceeds from the goods that are produced during the testing phase of assets. After the changes has been done in para 17, the sales proceeds from the sales of goods produced during the testing phase are not being subtracted from the cost or value of assets that has been put to use, and instead the sales proceeds are being taken to the profit and loss account (Wahlen, Jones and Pagach, 2015). All these changes to the IAS 16 will help the business entities to represent the items of property, plant and equipment at their actual cost and take the sales proceeds into the profit and loss account. This will satisfy the recognition criteria of sales revenue in the profit and loss account instead of taking it to the cost of assets as deduction from the cost of testing (Exposure draft, 2017). After changes has been made the financial statement present clearer picture and fulfill the requirement of other accounting standard (Christian & Lüdenbach, 2013).
The public interest theory provides that any rules and regulation that has been drafted for public use and it impact the public at large than due care must be taken. The rules and regulation must be such that it promotes the well being of people at large not the specific class of people or industry. The accounting regulators that are responsible for development of the accounting standards or those who are in charge of protecting the rights of people must take care that any addition and modification to the accounting standards must in compliance with the requirements of people at large not to benefit the small section of the society. The unfair practices in development of the accounting standard will provide benefits to the special class of people and will create disadvantage for other people (Alexander& Archer, 2008).
On the basis of the analysis of proposed changes to the IAS 16 Property, Plant and Equipment it can be said that changes provided are in public interest and does not benefit any particular class of people as it wide open for all (Camfferman & Zeff, 2007).
Various comment letters have been received from the accounting professionals and regulators all around the world to express their opinion on the exposure draft. Comment must provide whether they are agree or disagree with the changes that have been made in the exposure draft. Four comment letters have been selected on random basis from the list of comments letters provided on the IASB portal (Comment Letters, 2017).The comment letters have addressed the questions that are being asked in the exposure draft. The four comments are provided below:
- Comment Letter 1 (Given by the Financial Reporting Council established in United Kingdom): The management at FRC United Kingdom has critically evaluated the exposure draft and has reached on the opinion that exposure draft is not favorable for public interest as it provide benefits only to some category of people those are engaged in mining and pharmaceutical business. They argued that he proposed changes are specific to the special category of people and do not benefit the people at large. There has been no clear definition of the goods that can be taken into profit and loss account.
- Comment Letter 2 (Given by the Certified Public Accountant Australia): According to the information given in the comment letter it can be said that CPA Australia favors the proposed changes in the accounting standard IAS 16. They welcome the changes and say that such changes will help to recognize the sales proceeds in the profit and loss account which helps in making the clear representation in financial reporting.
- Comment Letter 3 (Given by the Association of Accounting Technicians): As per the comments provided by the AAT, it seems that they favor the proposed changes. They further add that such changes will bring more clarity in treating the sales revenue from the sales of goods produced during the testing phase of assets.
- Comment letter 4 (Provided by the Brazilian Accounting Committee): The comments provided by this accounting body favors the changes the proposed by the IASB as it helps in presenting the financial information more precisely while performing the financial reporting (Comment Letters, 2017).
The exposure draft in relation to proposing changes in the accounting standards for recognition of property, plant and equipment have received support from 3 comment letters. However, 1 comment letter has provided the opinion in against of the exposure drafts is it intends to support the growth of some specific business entities (Comment Letters, 2017).
The opinion derived from comment letters can be supported with the theories of private and public interest. The private interest theories applicable to the comment letters as they support the proposal of exposure draft by not considering the impacts of the changes at a wide level. However, only one comment letter have provided the opinions on the basis of public interest theory regarding the exposure draft by considering its impact at a wide level and not only on specific business entities (Comment Letters, 2017).
Conclusion
The report has provided a deeper understanding of the accounting article selected with the application of relevant accounting theories. The article selected relates to the latest changes that are occurring within the financial reporting environment of Australia as per the changes in the international financial reporting standards.
References
Alexander, D. & Archer, S. (2008). International Accounting/Financial Reporting Standards Guide 2009. CCH.
Camfferman, K. & Zeff, S. (2007). Financial Reporting and Global Capital Markets: A History of the International Accounting Standards Committee, 1973-2000. OUP Oxford.
Christian, D. & Lüdenbach, N. (2013). IFRS Essentials. John Wiley & Sons.
Comment Letters. (2017). Retrieved 6 May, 2018, from https://www.ifrs.org/projects/work-plan/property-plant-and-equipment-proceeds-before-intended-use/comment-letters-projects/ed-property-plant-and-equipment/#comment-letters
Epstein, B. & Jermakowicz, E. (2008). Wiley Ifrs: Interpretation & Application of International Financial Reporting Standards. John Wiley & Sons.
Exposure draft. (2017). Retrieved 6 May, 2018, from https://www.ifrs.org/-/media/project/property-plant-and-equipment/exposure-draft/exposure-draft-property-plant-equipment-june-2017.pdf
Gwan, M. 2018. IFRS quarterly newsletter. Retrieved 6 May, 2018, from https://www.grantthornton.com.au/insights/technical-publications–ifrs/ifrs-quarterly-newsletter/
IFRS. 2018. IFRS 9 and IFRS 15 are now effective. Retrieved 6 May, 2018, from https://www.ifrs.org/news-and-events/2018/01/ifrs-9-and-ifrs-15-effective-this-year/
Ordelheide, D. (2016). Transnational Accounting. Springer.
Parker, R. (2013). Accounting in Australia (RLE Accounting): Historical Essays. Routledge.
Riahi-Belkaoui, A. (2004). Accounting Theory. Cengage Learning EMEA.
Wahlen, J., Jones, J. and Pagach, D. (2015). Intermediate Accounting: Reporting and Analysis. Cengage Learning.
Wasieleski, D. & Weber, J. (2017). Stakeholder Management. Emerald Group Publishing.
Wiley IFRS 2008: Interpretation and Application of International Accounting and Financial Reporting Standards 2008
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