Changes in Accounting Standards
Discuss About The Wealth Maximization A Function Of Statutes.
The introduction of IFRS have brought about an enormous change in the reporting structure and how the company is doing the general accounting. It has had an impact on the equity, assets, liabilities and surplus of the entities in Australia. The implementation of the IFRS was a complex task which involved significant differences between the reporting as per country specific accounting standards and the IFRS which was being used worldwide (Bromwich & Scapens, 2016). Australia was one of the first countries to adopt the IFRS accounting and a lot of businesses got impacted due to this. There were several discussions as it to it would lead to material changes in the entities financial performance and quality of reporting as there were huge differences in AASB and IFRS standards. Some of these changes and their impact have been shown below in the analysis.
IFRS was introduced in Australia post 01st January 2005. AASB 132 which was based on financial instruments: Presentation and Disclosure introduced a more stringent definition of the equity and thereby preference shares and various other hybrid instruments which were earlier classified as equity were now reclassified as liabilities (Belton, 2017). Similarly AASB 139, on financial instruments, recognition and measurement also laid down stricter requirements for the companies requiring them to bring back the financial assets like mortgages that had been securitised in the past and have been derecognised from the balance sheet. Furthermore, as per AASB 139 on hedge accounting and derivative instruments, all of them will be measured at fair value and then recognised in the balance sheet. This was a departure for the then treatment of the derivative instruments which were recognised off balance sheet. Post 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). As per the new rule, impairment provisions will be recognised on 2 basis namely incurred and incurred but not reported basis meaning it will be reported as provision only when the loss experience has occurred, if it hasn’t occurred and it is mere probability, then the provision cannot be recorded against the same.
The IFRS changes were applicable for all the entities be it profit making, not for profit, private or public. Some of the key benefits which were attributable by the adoption of IFRS in Australia are listed below:
- Helps in attracting capital to Australia due to uniformity in accounting and reporting as compared to the rest of the world. Therefore, on totality there would be less cost of capital.
- It will result in lower costs for the preparers and the auditors and will result in increasing efficiency and decreasing the costs. There will be no need to recast the financial statements every now and then(Bizfluent, 2017).
- There will be no anomalies in the financial statements which were present in Australian GAAP.
- It will lead to more transparency of the accounting and reporting and the disclosures will help enhancing the qualitative characteristics of the financial statements like understandability, verifiability and reliability of the financial statements(Das, 2017).
- Loss of the Australian GAAP procedures and guideline on the topics like employee benefit accounting
- Implementation of new accounting procedure meant that accountants need to be trained in that regard and there was huge time, costs and effort involved in the same.
- It compromised with the comparability aspect of the qualitative characteristics of the financial statements(Chron, 2017).
Benefits and disadvantages of adoption of International Accounting practices
- 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.
- It is also more comprehensive in terms of insurance company accounting, extractive activities and intangible assets(Félix, 2017).
- It changed the perspective of accounting in terms of quality with respect to earnings management, value relevance and timely loss recognition.
The adoption of International standards has also brought about a change at the macro-economic level rather than just the micro economy level. This has increased the competitiveness on the global front as well as paced up the economy (Dichev, 2017). It has removed barriers to the international capital flows and increased comparability of the financial reports. The quality of reporting and the benefits to the stakeholders has increased as they are now aware of the policies and procedures better than ever before and are able to take informed decisions. It also brought about an improvement 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 redundant and no more useful in terms of end users like AAS 27, 29 and 31 which were replaced by AASB 1022 and 1023. The main authorities which were responsible for the implementation was Financial Reporting Council (FRC) and the Australian Accounting Standards Board (AASB). All in all, if the changes are analysed, 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 check on how the introduction of the International Standards in Australia have contributed to economy and it was found that the it has brought about effective accounting practices and leveraged the global market. Accountants are sharing their skills and expertise across different locations and economies. The chief executive of ACCA also commented that it has added tangible positive value to the Australian economy and that the consistent and ethical accounting approach will add to the confidence of the investors and will be crucial for the companies as well as the country.
Below the example has been given considering one of the pioneer companies in Australia, the Wesfarmers. It is one of the Australian conglomerate which is 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 deals in chemicals, fertilisers, coal mining and manufacturing industrial and safety products. 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.
Main differences between the AGAAP and the IFRS
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.
From the above excerpt of the financial statement, it can also be seen that the company for the first time has applied AASB standards and accounting policies for the measurement of the derivative financial instruments and hedging applicable to the company (Goldmann, 2016). It mentions that the group uses financial instruments like interest rate swaps and forward contracts for hedging the risks associated with these. IT can be in the form of fluctuations in the interest rate or forex. These derivative financial instruments are measured at the fair value and if positive, recognised as asset and in case negative, are recognised as liability in the balance sheet. Any gains or losses realised in the fair value are directly be 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.
For 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, et al., 2017). It also mentions that the impairment accounting policy would be applicable 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. Similarly 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. Whereas 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).
Other aspects and implications
Conclusion
From the above analysis and discussion, the findings suggest that the adoption of the International Accounting Standards and replacing the local GAAP by Australia was one of the best decisions in its accounting history as it brought them in par with the international reporting and accounting. This has improved the quality of the reporting in terms of what was previously not there in the Australian GAAP and the amendment of those standards which were backdated. Furthermore, it has improved many other aspects of reporting like valuation, the presentation of the financial instruments, the disclosure requirements and sustainability and corporate governance accounting. Australia being one of the earliest adopters of the international financial reporting standards enjoyed the benefits of it like coming in line with global standards and opening of the Australian economy for the foreign investments and capital thereby contributing to the economy as a whole. It has also benefitted the investors and the stakeholders community at large by giving them relevant and reliable information which meets the qualitative characteristics of the financial statements more comprehensively than the earlier standards. All in all, in case the implications of the standards in Australia after the IFRS period has to be summarised, it can be said to be in favour of the accounting profession in Australia.
References
Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp. 411-431.
Belton, P., 2017. Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat International ltd.
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Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis. Ecological Economics, p. 145.
Chron, 2017. five-common-features-internal-control-system-business. [Online]
Available at: https://smallbusiness.chron.com/five-common-features-internal-control-system-business-430.html
[Accessed 07 december 2017].
Das, P., 2017. Financing Pattern and Utilization of Fixed Assets – A Study. Asian Journal of Social Science Studies, 2(2), pp. 10-17.
Dichev, I., 2017. On the conceptual foundations of financial reporting. Accounting and Business Research, 47(6), pp. 617-632.
Farmer, Y., 2018. Ethical Decision Making and Reputation Management in Public Relations. Journal of Media Ethics, pp. 1-12.
Félix, M., 2017. A study on the expected impact of IFRS 17 on the transparency of financial statements of insurance companies. MASTER THESIS, pp. 1-69.
Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business. Financial Environment and Business Development, Volume 4, pp. 103-112.
Heminway, J., 2017. Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and Organic Documents. SSRN, pp. 1-35.
Kangarluie, S. & Aalizadeh, A., 2017. ‘The expectation gap in auditing. Accounting, 3(1), pp. 19-22.
Kuhn, J. & Morris, B., 2016. IT internal control weaknesses and the market value of firms. Journal of Enterprise Information Management, 30(6).
Sithole, S., Chandler, P., Abeysekera, I. & Paas, F., 2017. Benefits of guided self-management of attention on learning accounting. Journal of Educational Psychology, 109(2), p. 220.
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