Background of IFRS adoption in Australia
The practical application and adoption of the International Financial Reporting Standards has long been a subject of discussion, debates and controversies. From accounting bodies, accounting experts, finance experts, ministries of various countries and financial experts of various public as well as private sector companies have discussed about the possible impact of the changes which the new accounting standard would bring from the year of its inception of 2005. Majorly all of the business entities of the Australian economy, be it the public sector enterprises or the private sector employees,, all these business entities and organisation have adopted the changes brought in by IFRS from 1st January, 2005. Initially, the changes brought in were difficult to be implemented upon, because of the time taken to make the relevant adjustments. Since then, the endless discussions, and debates about the possible merits, demerits and about the implementation difficulties have been raging on in a continuing basis. It has been a long journey from 2001 till 2005 for the successful introduction of the accounting standards which have been internationally accepted. A report was prepared by the AASB in the year 2015, about the implementation status of the various standards of the IFRS. It was concluded in this report that the transition process from AGAAP (Australian Generally Accepted Accounting Principles) has been relatively smooth and efficient. The espousal of the IFRS principles of accounting and finance has provided many kinds of recompense to the Australian companies in many notable ways, most notably by enabling the financial statements as well as their planners and implementers and all the different stakeholders to move athwart sectors as well as countries for the purpose of comparing the financial results and finding limitations. Moreover, the creation of the financial statements in agreement with the new principles of IFRS has been a cost saving affair. Overall it has been a successful affair; more on this would be discussed later in the report. Presently, through this report, the major implications of the adoption of these principles of accounting, in the context of the famous Australian Airways company, Qantas Airways has been done. The impact and the various changes and implications have been shown by comparing the financial results and the annual reports of two different years of the Qantas Airways has been presented with. In this report study, the two periods which have been selected are 2004 (Pre-IFRS period) and 2007 (Post-IFRS period).
Introduction to Qantas Airways
Qantas Airways is the flagship aeroplane carrier in the Australian sub-continent and is the largest airline in terms of fleet size and international destinations. It was founded in the year 1920 and is the third oldest airline company in the world, right after KLM and Avianca. It is the market leader in the aviation market of Australia and is based in Queensland, Australia. It has around 65% share in the Australian aviation market and it also has carried about 15% of all the passengers in and out of the island continent of Australia. It has a wide range of subsidiaries including Qantas Link, Jet star Airways, and Jetconnect, etc. In the aviation sector, it was probably the inaugural company which had strongly advocated the usage and the implementation of the new and widely accepted international accounting standards of IFRS (Qantas.com.au. 2018). It was the only aviation company which had initially wanted and vouched for the implementation of an international accounting standard, which would have eased the process of the preparation and the comparison of the financial statements.
The introduction and the implementation of the new accounting guidelines of the IFRS were a time consuming, expensive and a cumbersome exercise. Qantas never wanted to leave any stones unturned in order to actively initiate the change and the implementation procedure as soon as possible. Therefore in order to do this, the airline company had taken some concrete and important steps. As a result of which the board of directors of the company had established a project group, which would report to the Chief Financial Officer to smoothly implement the transition procedure Qantas.com.au. 2018). The implementation of the project had three different phases, which are as follows:
- Assessmentphase: In this phase, a high level of overview on the impact of IFRS on the existing accounting and reporting principles has been looked upon. As a result of which, important step regarding the adjustments to the policies, systems and procedures of accounting have been undertaken.
- Design phase: The design phase had progressed well under the worthy stewardship of the CFO of the company. The designs of this stage would include the following things, which would be necessary to make any kind of changes in the existing accounting principles and practices. The designs would include formulating revised accounting policies and procedures for effective compliance with the IFRS, developing revised IFRS disclosures and designing effective financial, accounting and business processes to provide support to the IFRS reporting standards and obligations. After the conclusion of the design phase, a report would be sent to the CFO and the audit committee of the company to seek their approval and nod, in the case of the changes made in the existing accounting policies and principles (com.au. 2018). In case of any changes are required, they would be immediately addressed.
- Final implementation phase: After seeking the nod from the audit committee and the CFO, the project group would go on with the implementation process. This phase would include the implementation of the different identified changes in the existing accounting procedures, processes, financial and internal systems of the company and the training of the staffs too. The entire implementation phase was completed during the financial year of 2004-005.
The various implications of the IFRS principles and accounting practices have been shown with the assistance of the four primary accounting topics which forms a fundamental part of any business entity’s financial statements. The four major areas of the impacts and implications are as follows:
- Defined Benefit Superannuation plan
- Recognition and measurement of the different financial instruments
- Impairment of Assets
- The Frequent Flyer Programme
Each of these implications and the changes regarding the adoption of the IFRS accounting principles and practices on each of these aspects of the airline company has been comprehensively discussed below along with the assistance of the annual reports of the two year periods of 2004 and 2007 and in association with the financial statements of the aviation company of Qantas Airways. The impacts of the changes are as follows:
A defined benefit superannuation plan refers to that kind of a pension plan in which an employer/sponsor of the concerned company promises a specified pension payment amount, which might be lump-sum in its nature or combination thereof on the retirement of the particular employee, which is ascertained by a applying a formula, which is based on the concerned employee’s earnings and salary history, total tenure of service and age, rather than depending directly on individual investment returns from that. Qantas has been considering the relevance and consequent implementation of the AASB 119 “Employee Benefits” to the acknowledgment of the funding surplus or deficit of the Qantas sponsored defined benefit superannuation plans. Under the new requirements, as advocated by the IFRS, any kind of surpluses or deficits in the defined benefit superannuation plans which are within the consolidated business entity would consequently be recognised and identified in the Statement of Financial Position (Pre-IFRS version of the Income statement) and the different kinds of movements in the surplus or deficit would be recognised and identified in the Statement of Financial Performance of the company (Ahmed, Neel and Wang, 2013). The expected implication of this benefit plan is likely to be a onetime reduction in the retained earnings of the aviation company and the analogous acknowledgment of a retirement liability for the company.
The implementation phase of IFRS at Qantas Airways
The aviation company has also assessed that a change would be required in the case of the lease policy of the company as per the new guidelines and policies of the IFRS. As a result of which, Qantas has been considering the appliance of the AASB 117 “Leases” section, in order to an effective classification of the different kinds of lease transactions undertaken by the aviation company, be it in terms of supply or any other aviation materials. In accordance with the newly established and applied principles of the international accounting standards from the year 2005, In accordance with these new principles, the current leases, which are under the operating section, might need some kind of identification and recognition in the statement of Financial Position or the income statement of the company. However, the exact financial implication of this change had yet not been determined and ascertained; therefore it is not expected to have any kind of significant of relevance or impact on the income statement or the Statement of Financial Performance in the future years to come.
The aviation company of Qantas Airways along with the assistance of its audit committee, finance experts and the CFO, have overseen a incredible amounts of changes in the procedures of recognising and measuring the different financial instruments of the air and aviation company of Qantas Airways and different other countries which have been rigorously following all the relevant provisions of the IFRS. The different kinds of financial instruments which have been impacted upon by IFRS are as flows:
- Fuel hedging: Qantas is taking into consideration the appliance of the AASB 139 “Financial Instruments: Recognition and Measurement” to evade the act of fuel hedging transactions. Widespread hedge efficacy testing and certification is required under the different provisions of the IFRS in order to initiate and as well as apply hedge accounting to all these transactions. The probable appliance and effects of this accounting standard on aviation fuel hedging has yet not been determined (Loktionov, 2009). As a result of which, in this regard, the management of the aviation company of Qantas, has not been able to take a concrete decision as it is susceptible to change.
- Revenue hedging: In order to initiate the application of the different accounting standards of IFRS, Qantas airways had been considering, making an allowance for the appliance of the AASB 139 “Financial Instruments: Recognition and Measurement” to the sector of revenue hedging dealings and transactions. The impending appliance, usage and the resultant implication of the relevant accounting standards upon revenue hedging has not been concluded. It is been anticipated that, after the initial adoption adjustments are made, the current and existing accounting treatment would continue under IFRS, although it will be subject to a lot of increased efficiency testing along with different kinds of documentation and citation requirements.
Qantas is making an allowance for the appliance of AASB 136 “Impairment of Assets” to the valuation process and procedures of the assets. In accordance with the new rules and regulations of IFRS, assets need to be tested for the purpose of impairment based on their potential to produce independent cash inflows from regular use. If the assets do not produce cash flows they may be classified into different groups for the purpose of shaping the smallest identifiable group of assets that generate cash inflows which are largely autonomous. Aircraft carriers do not directly create cash flows as revenue from passengers is derived from the sale of seats on flights rather than from seats on any particular aircraft. The totality of the aircraft cash flows is therefore performed mainly based on the route planning’s of the different aircraft carriers. Therefore in this case, impairment testing upon changeover to IFRS is essentially needed. The monetary implication of this change is not expected to upshot any noteworthy impairment losses after conversion (Qantas.com.au. 2018). The effects on future financial years are reliant on the cash flows which would be generated by each assemblage of assets and is therefore unable to be ascertained as of now.
The four major areas impacted by IFRS at Qantas Airways
Qantas has taken into account the application of the standard of AASB 118, “Revenue” for the purpose of accounting the frequent flyer programme of the company. Although both the Australian GAAP which was prevalent in those years as well as the IFRS upon its application does not specifically address any kind of accounting for frequent flyer/loyalty schemes.
The Deferral approach of accounting for frequent flyers results in the deferral of frequent flyer revenue until the earned points are actually redeemed. The Incremental Cost method identifies revenue when the different revenue points are billed to individuals participating in the scheme, with the acknowledgment of a parallel provision for the increased cost of delivering the service at a later date. Both the methods are effectively used by airlines on a global scale and the most suitable accounting policy for the frequent flyer programme is reliant on various kinds of factors such as the volume of the program, the systems for overseeing the redemptions and the probability for frequent flyers to dislodge fare-paying passengers. In accordance with the Australian GAAP, Qantas had adopted the Increased Cost approach, as historically speaking, it has best reflected the commercial manoeuvres of the program.
As part of the Qantas IFRS conversion project, the aviation company is making an allowance for transferring to the Deferral approach of accounting. Prospects of future growth in this scheme and an aspiration to make redemptions easier may need changes to the prevalent trivial management of the entire scheme. If a decision to convert to the Deferral method is accepted, revenue which had been previously acknowledged and identified would be postponed and the amount of retained earnings would be condensed. In future periods of time, deferred revenue would be presented to the Statement of Financial Performance or the income statement as and when the points are redeemed (Daske et al., 2013). This accounting treatment would no longer require the raising of any kind of future provisions for future increased costs.
The adoption of the IFRS reporting standards had a significant amount of influence on the performance of the business entities not only in Australia but also in a global scale incorporating different countries from around the world. This has led to the harmonization of the financial statements, which consequently, has brought about a certain level of uniformity in the preparation, compilation and reporting of the different types of financial statements (Matolcsy and Wyatt, 2006). A comprehensive list of the most important contributions and advantages, provided by the new accounting standards of the IFRS has been provided below:
- Most importantly, the adoption of the financial standards of the IFRS has brought a new life into the preparation of the different financial statements. It has provided a new set of novelty to these financial statements. A comprehensive uniformity has been provided to the different accounting and financial statements. This has helped various companies such as the domestic ones to take note of the financial statements of the international companies and compare their individual performances and finding scope of any improvements.
- Adoption of the principles of IFRS has enabled the investors and various other users of financial data to have a clear, precise, accurate and comprehensive set of data. On the basis of these data, they can take their investment decisions in a timely manner. Moreover, if the concerned business is able to convey a promising outlook of their functioning and performance, the pool of potential and prospective investors and lenders would continue to grow and expand (Odia and Ogiedu, 2013).Since the turn of the last five years, this has led to the abundant growth of many Australian companies into global multinational giants such as Woolworth, Rio Tinto, and Commonwealth bank etc.
- Implementation of all these standards has resulted in a drastic improvement in the financial controls. This has happened by standardising the different approaches, methods and control over the statutory reporting of the business. As a result of which, businesses would have reduced amount of risks of penalties and compliance problems (Horton, Serafeim and Serafeim, 2013). This would result in improved and better internal control over the different operations of the company.
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Qantas.com.au. (2018). Flights to Australia, New Zealand and Singapore | Qantas UK. [online] Available at: https://www.qantas.com.au [Accessed 24 May 2018].
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