Identification and Implementation of Negative and Social Consequences
The major negative economic and social consequences that might have risen from the introduction of new accounting standard on Intangible assets AASB 138 are as follows:
- All the accounting standards that have been issued and which have been made compulsory have the objective of having the accounting done which shall be free from any error or free from any form of bias or any financial or non financial interest. But with the introduction of this standard will affect the basis purpose of accounting of objectivity, bias free and true and fair view.
- It will be in totally a political based standard which help in distributing the wealth of the company within the society in which the company operates.
- The body which prepares the standard and made it mandatory will give an opportunity to the affected parties to give their suggestions and the oppositions on the prepared draft of standards.
- Generally, with the introduction of any new standards, the users of the financial statements so prepared accordingly does not even know as to why certain requirements have been bought or changed as compared to the previous standards or why the disclosure requirements have been increased in comparison to the requirements in earlier standards. Therefore, they are generally unaware of the fact that the financial statements and other reports which have been prepared now are only because of the pressure created by the political party in rule of the specified country.
- Any standard might be useful for one company or class of company and on the other it might not be useful for other companies or class of companies. Therefore, there will be the chances that the some companies or class of companies or even the industry might have resisted in accepting the provision of standard or might have fully rejected the standard while preparing the financial statements at the yearend (Chapple, 2015 and Ernst and Young).
In order to have more insight, the negative and social consequences can be understood treatment of Research and Development expenditure as defined under new standard. As per the new accounting standard now the companies have to charge the expense incurred on the research and development expenditure to the profit and loss account. There will be negative effect as the entities with valuable research and the useless research will be treated at par and thus the efficiency of the standard can be challenged and managers will know that any type of research undertaken will directly affect the profit of the company.
A per the IAS 17 / AASB 117, while making any accounting treatment the lease needs to be first identified as to whether it is the financing lease or the operating lease. The economic reality comes under the second type of lease. In accounting treatment of the operating lease, the lease rentals that are required to be paid to the lessor are charged to and expensed in the Statement of Profit and Loss. There are the cases of non cancellable operating lease where the corresponding asset or liability shall be booked in accordance with the concept of prudence. But No asset or liability was recognized in the Balance Sheet which to the some extent effects the true and fair view concept negatively and hence does not reflects economic reality (Hendry, 2016).
In the case of the operating lease, as per the former accounting standard AASB 117/ IAS17, the companies are not required to show the asset or liability in case of the Operating lease. Here only the lease rentals are charged to the Statement of Profit and Loss at the end of the every financial and is paid through cash or bank. There are always the liabilities at the end of the year related to the lease which are not accounted for in the books of accounts but are disclosed as per the requirements of accounting standard in the Notes to the financial statements of the company. These liabilities for example comprises of the future lease payments that the company have to made at the end of the year to the lessor. This liability is revised at the end of every year which usually counts as more than 50% of the outside liability that is reported on the face of the balance sheet (Hendry, 2016).
Former standard does not reflect economic reality
Level playing field means where both the parties follow the same set of rules and principles which has been prescribed under the laws or statutes governing the state or country and No level playing field between companies means a situation where the advantage has been given to one company by the law or statutes and the company takes the benefit of same. In relation to the airlines companies, it is said because under the former accounting standard on lease the company can report the asset or liability in relation to the operating lease off the balance sheet. Due to which the financial statement of the company who is having its own airlines and the company who borrows the airlines from the other company reflects the same picture as the asset or liability in case of borrowing airlines does not come. For instance, Emirates uses its own airlines whereas the German airlines bought from other have the same picture of the financial statements. (Europe Economics, 2017).
The new accounting standard on leases has made it mandatory for half of the listed companies. It means that the provisions of the accounting standards are not applicable for all the companies. The small companies will be out of the purview of the new accounting standard due to which the small companies may continue not to recognize the asset or liability as required under former standard and rather gives the values off the balance sheet. Also the main companies that will be affected are airlines and the retailing companies which approximate around 50% of the listed companies across the world. Thus, the standards will not be popular with everyone. (Europe Economics, 2017).
With the introduction of the new standard, the financial statements will give the true and fair view to the users of the financial statements mainly the investors under question who can take the decision on the basis of financial ratios and wealth of the company. Also it will help the company to decide whether to but the asset or lease the asset by providing the actual data of asset and liability and the expense that needs to be incurred.
References
Chapple S, (2015), “AASB 138 – Intangible Assets – the bad apple in the IFRS barrel”, Faculty of Commerce, University of Wellington, pp 06-29
Ernst and Young, “ Request for comment on IASB 38 Intangible Assets”, available at https://www.aasb.com.au accessed on 27/04/2017.
Europe Economics, (2017), “Ex Ante Impact Assessment of IFRS 16”, available at https://www.efrag.org/Assets/Download?assetUrl=%2Fsites%2Fwebpublishing%2FSiteAssets%2FIFRS%252016%2520-%2520Europe%2520Economics%2520-%2520Ex%2520ante%2520Impact%2520Assessment%2520%2822%2520February%25202017%29.pdf&AspxAutoDetectCookieSupport=1 accessed on 27/04/2017.
Hendrie R, (2016), “Difference between IAS 17 and IFRS 16: How lease accounting is changing” available at https://blog.innervision.co.uk/blog/the-difference-between-ias-17-and-ifrs-16-how-lease-accounting-is-changing accessed on 27/04/2017.
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