Australian accounting standards - Essay Example

?Australian Accounting Standards Table of Contents Table of Contents 2 Answer to Question No a 3 Answer to Question No b 4 Answer to Question No 1 c 5 Answer to Question No 1 d 6 Answer to Question No 1 e 7 Answer to Question No 2 9 References 12 Answer to Question No 1 a The Financial Reporting Council (FRC) had decided to support the fact that Australian Accounting Standards would be consistent with the International Accounting Standards from the adoption onwards due to certain specific reasons. The first reason is the challenge that has been put upon the US GAAP standards due to financial meltdown of Enron. As a consequence to the failure of the US GAAP, various nations all over the world grew more attracted towards a financial reporting system which is more principle-based. FRC was in support to the system because principle-based rules are the regulator within the capital markets. Moreover, this system is broader than the rule-based system and need interpretation. Also several international legal systems are based on approaches derived from principles. Practically, the FRC supported the adoption process because of the indication towards lessening of information costs. Following the accounting processes under International Accounting Standards is accompanied by the cost reduction. Adoption of the international standards would also enhance efficiency within the Australian capital market through capital flow into the market. Enhancement of market efficiency would be possible because through the adoption, the nations would be able to set internationally accepted, competent quality, equivalent and apparent standards of accounting (Abeysekera, 2005). Although there are considerable benefits associated with the adoption of international standards of accounting, there are also various potential barriers that hinder proper implementation of the International Accounting Standards all around the world. Cultural factor is also among those potential barriers to the standards’ adoption. The propensity to restrict the implementation primarily prevails among the businesses which are conducted locally inclusive of the small and medium enterprises. This is due to the existence of strong cultural and regional values among the people within the firms. For completely implementing the international accounting standards, it is the most significant to educate the firm’s auditors and accountants about the processes to be followed. Due to the cultural resistance to international adoption, the entire implementation process gets hampered. Cultural barriers impact the way that the financial statements are overviewed. Adoption of international standards would require evaluation of financials based on concepts. Pertaining to the cultural beliefs, a massive expense incurred due to a day-off because of regional program might not be considered to be harmful. A number of day-offs would at times lead to prevalence of huge imbalance in financial statements (Sawani, 2006). Answer to Question No 1 b From January 1, 2005, the units operating under the Corporations Act (2001) of Australia were required to frame and present their respective financial statements as per the standards being followed in the International Accounting Standards Board. Although Australia was boosting up towards harmonizing its standards as per the international ones, after the comprehensive adoption, the transformation process would make various business aspects to change. As regards to the practices within financial reporting, reported results of the Australian firms had to be presented in a changed way and also the adoption affected compensation based on performance. Apart from these general transitions, the acknowledgment and measurements of the firms’ assets and liabilities also were affected. To name a few, various financial instruments were to be recorded within the financial statements as per their fair values. This change even resulted in classification of instruments as debts which were previously classified as equities. Amortisation of goodwill was impaired, though was subjected to stringent norms of testing. Investments were undertaken at cost and were depreciated, otherwise at fair value with recognition as per the income. The policies towards dividends were altered after the adoption along with changes in the positions of earnings per share for the shareholders and also net assets. The level of compliance with the various contacts that are based on accounting underwent changes. In a nutshell, major portion of the structure and substances of the Australian firm’s annual report had to be changed (InConsult Pty Limited, 2004). A massive of test for impairing replaced the test for recovering amounts. The tests for impairment were applied to the entire sets of businesses operating under the public sector segment. The regulatory requirements for Australian financial process after the adoption demanded assortment of policies that are in compliance with those of the IFRSs at the period of initial transition. The regulations also demanded formation of a, ‘opening balance sheet’ and initiate it as the beginning of processes adapted as per the international standards. The business units were mandatorily required to follow the same policies of accounting throughout every period during presentation of their financial statements (The State of Queensland, Queensland Audit Office, 2003). Answer to Question No 1 c The entities that were required to prepare financial statements according to the International Financial Reporting Standards in Australia after adoption of the standards during January 1, 2005 were the public sectors companies, companies being operated by large proprietors and the schemes of investments being managed through authenticated process of registration (Doyle, 2005). The entities had to mandatorily adhere to certain requirements, with certain exceptions, when they were into the preparation of their financial statements in accordance to the international standards. They had to be aware of the sets of financial assets and liabilities, the recognition of which was demanded by the IFRS. The assets and liabilities that are not demanded by the IFRS to be recognised should not be considered during preparing the statements. Application of the international standards for measuring the recognised assets and liabilities were required from the entities (Bradbury & Zijl, 2003). As stated in AASB Policy Statement 4, the adoption step would enhance comparability in various countries in regards to preparation of financial reports and thus would provide convenience to the investment and credit decision making process undertaken in the capital markets. The benefits stated would definitely attract investors towards the country as a result of which financial stability would become achievable. Another benefit stated in the AASB Policy Statement 4 is that the process would give rise to higher inflows of capital. This benefit would materialise because through comparable financial reporting, investors would better understand the financial position and would invest. It was also stated that costs as per the financial reporting would decrease for the Australian multinational firms. This would also be achieved because the auditors, analysers and accountants were not required to re-cast their financial reporting system for the international investors. There would be definite quality improvement in the techniques of financial reporting in Australia, according to the AASB Policy Statement 4. This benefit was achievable as the better depiction of financial status as per the international standards would enhance image and reputation of the Australian firms within the international phenomenon. The benefit statements were all in line with the strengthening of financial stability of the Australian firms (Australian Accounting Standards Board, 2002). Answer to Question No 1 d The approach that the international standardisation of financial reporting terms as ‘one-size-fits-all’ cannot be considered as a ‘naive’ perspective, nor it can be termed an effective one. This is because the approach is helpful is eradication of complexity but at the same time it also eradicates the capability of interpreting performance within each departments and units of the firms (Peel & Et. Al., 2008). The ‘one-size-fits all’ approach is required to be evaluated with respect to every standard for measuring its effectiveness as it might not be suitable in all the cases. Moreover, the nature of each business activities varies among themselves that results in variation in the preparation of balance sheet. The same approach for every business might force certain businesses to adjust their presentation of assets and liabilities. The approach can thus lead to less reliability on the firms’ financial statements by international investors (Investopedia, 2011). The selection of the most appropriate standard for accounting should be based on the evaluation that the standard provides important, consistent, unbiased and most importantly comparable information in relation to financial aspects of the business firms. A single approach towards financial reporting standards reduces the scope of evaluating and finding the best approach. Thus, as a consequence, effectiveness of the reporting standards can actually deteriorate. Flexibility in following accounting standard leaves the scope of analysing the various standards with respect to cost and benefit and selecting the most appropriate. A cost benefit analysis would provide the basis for determining as to whether the anticipated standard is appropriate for every entity or the standard should be applied in certain specific group of entities and not the entire set of entities. In addition to this, it is also essential that the accounting standards are evaluated on the basis of commercial aspects of the business units. This is required for promotion of conformity from the part of the accountants or auditors who prepare the financial statements. Adoption and follow-up of any particular accounting standard would limit the scope of measurement and selection of the best standard that has the potentiality to affect financial position of the business units (Commonwealth of Australia, 1997). Considering the various dimensional discussion, it can be presumed that the assumption of adopting a ‘one-size-fits-all’ approach might not be considered as an effective choice. Rather, the discussion turns the conception towards considering the approach a ‘naive perspective’. Answer to Question No 1 e The arguments in favour of the standardisation of financial reporting on an international basis have been provided by several authors for inculcating various aspects such as that of wide scope and comparability of the international standards. Along with this, the arguments were also provided on the basis of improved capital inflows from the international market, cost efficiency as regards to the operations of multinational firms, enhanced quality of financial reporting and providing financial reporting standards to the countries with limited resources at low cost. Besides the comparability factor as an advantage to the international standards, it has been argued that separate standards of accounting on a national basis actually limit the scope for developing international business. The hindrance to the development of international commerce is because national standards impose conformity costs upon the operations of the multinational firms. The Chairman of the US Securities and Exchange Commission, Harvey Pitt (2002) placed his argument in favour of the international standardisation. He mentioned the fact that as per this standardisation, the non-American firms that are listed in the securities exchange of the US might not require to restate their financial statements with regard to the country’s national standards. This would revive them from incurring of extra cost and time, thus enhancing efficiency of the firms. Another strong argument in favour of the international standardisation process is on the basis that this standardisation would lead towards an adoption of such measures holding strong potentiality for enhancing performance of the developing countries. According to Nobes and Parker (2002), various developing countries such as that of Pakistan, Nigeria and Croatia have been receiving advantages through adoption of the international standards of financial reporting with almost no adjustment as their respective standards (Malthus, 2004). Counter to the above arguments, it can be set forth that the international standards for financial reporting might not be appropriate for the developing countries and also there can arise several resistances to adoption due to factors such as cultural barriers. Additionally, implementation of the international standards requires skill and expertise while the developing countries might lag in that attribute. Another disadvantage is associated with first time convergence with the international standards which is with respect to the involvement of cost for switching. Along cost, disruption is also anticipated by certain countries. Although there is prevalence of wide range of arguments both in favour as well as against the adoption of international standards for financial reporting, the arguments in favour are more influential than the ones which are against. The strongest basis of this statement is the provision of comparable factors after international standardisation process. Comparability is positively related to the enhancement of financial stability of the business firms in the international market and in turn overall performance enhancement (Ramanna & Sletten, 2009). Answer to Question No 2 Considering the information provided with regard to the Australian Future School Group (AFSG), the decision as to whether the group is a reporting entity or not is to be taken. The decision will be generated as per the definition of reporting entity provided under the Statement of Accounting (SAC) 1 and also other relevant concepts under the same. According to the definition of ‘reporting entity’ provided by the SAC 1, entity indicates every arrangement developed on the perspective of lawful, managerial or fiduciary basis and also any organisational structure and any other body inclusive of individuals. The conditionality based on which any bodies can be considered as an entity is that the bodies should possess the capacity of utilising the available scare resources for the purpose of achieving their respective objectives (Paul, 2010). Comparing the case of AFSG, with the definition of entity, it can be concluded that the group is an entity because it is an organisational structure with proper administrative and legal framework. Along with this justification, it is also inferred from the case that the group is capable enough to utilise its available resources with respect to money and people within the operations for achieving its objective of providing valuable education to its students. Moving towards the definition of ‘reporting entity’, this is composed of all the entities inclusive of the economic entities as well provided that it is rational and logical to anticipate prevalence of ‘users dependent on general purpose financial reports’ seeking for useful information that are essential for them in deciding about the distribution of scarce resources. Justification as to whether AFSG is a ‘reporting entity’ or not can only be initiated after identifying the ‘users dependent on general purpose financial reports’. Identification can be done with respect to three essential factors provided in the SAC 1. The first factor is in relation to parting the management and economic interest. As per this factor, existence of dependent users can be expected if the membership within the entity is spread and there is separation of members with economic interest from the management, then there is greater possibility of existence of dependent users (Australian Accounting Standards Board, 2001). In the case of AFSG, the members who can apply to be elected within the management committee are the parents of the children who are enrolled within the school. Thus, they are obviously, without economic interest because their aim is to educate their children at any cost. However, it is not inferred from the case facts that whether the parents who get enrolled as members in management committee would get any monetary benefits as regards to the reduction in their cost of admitting their children. On the assumption that there are no monetary benefits in terms of cost reduction for the parents after getting into the management committee, the decision that there are dependent users has been taken as per as the first factor is concerned. The second factor for identifying dependent users is based upon the entity’s economic or political influence or importance upon the well-being of the parties external to it. According to the factors defined by SAC 1, if the influencing power of the entity either economically or politically is high within the society, then there is greater possibility of prevalence of dependent users (Australian Accounting Standards Board, 2001). On the basis of this factor, decision about whether AFSG is a reporting entity or not cannot be appropriately taken. This is because normally, with regard to this factor, entities are in a market dominating position whereas information as to whether AFSG is the best school within the community or not are not present. However, it can be generated that schools have high influencing capability for the external parties or the societal individuals. Considering this fact to be applicable for AFSG, it can be concluded that there exists users who are dependent on general purpose financial reporting for taking decision about allocation of scarce resources. The third and final factor that can be used for identifying the dependent users is the financial characteristics of the entities. The financial features of the entities are composite of the size or indebtedness. Size can be determined by the assets’ value or the number of employees operating within the entity. The existence of dependent users is directly related to the size or indebtedness of the entities. If the asset and liabilities of the entity or number of employees working within the entities are high, then there is greater possibility of the dependent users’ existence (Australian Accounting Standards Board, 2001). Considering the facts provided about AFSG, the total assets stood at $2500000 and liabilities stood at $1250000 which are high. Size of the school with respect to the number of employees is also quite high as a total number of 75 employees work. In view of this data, it can be concluded that there is large potentiality for the existence of dependent users who relies on the general purpose financial reports of the school for taking decision. Thus, from the above discussion regarding the prevalence of users dependent upon the general purpose financial reporting of AFSG, it is evident that there is high possibility of their existence. Hence, it can be concluded that AFSG is a reporting entity in accordance to the facts provided about reporting entity in SAC 1. References Abeysekera, I., 2005. International Harmonisation of Accounting Imperialism - An Australian Perspective. Department of Accounting and Finance Macquarie University. [Online] Available at: http://www.mngt.waikato.ac.nz/ejrot/cmsconference/2005/proceedings/criticalaccounting/Abeysekera.pdf [Accessed August 26, 2011]. Australian Accounting Standards Board, 2001. Definition of the Reporting Entity. SAC 1 (8/90). Australian Accounting Standards Board, 2002. International Convergence and Harmonisation Policy. Policy Statement PS4. Bradbury, M. & Zijl, T. V., 2003. Shifting to International Financial Reporting Standards. University of Auckland Business Review. Commonwealth of Australia, 1997. Building International Opportunities for Australian Business. Accounting Standards. [Online] Available at: http://www.treasury.gov.au/documents/281/PDF/full.pdf [Accessed August 27, 2011]. Doyle, P., 2005. Regulation of Corporate Finance Activity in Australia. Legal Media Group. [Online] Available at: http://www.iflr1000.com/pdfs/Directories/5/Australia%20%2833-49%29%28i%29.qxd.pdf [Accessed August 27, 2011]. InConsult Pty Limited, 2004. Adoption of International Accounting Standards. Images. [Online] Available at: http://www.in-consult.com.au/images/ias.pdf [Accessed August 26, 2011]. Investopedia, 2011. 12 Things You Need To Know About Financial Statements. Articles. [Online] Available at: http://www.investopedia.com/articles/basics/06/financialreporting.asp#axzz1WD455XOe [Accessed August 27, 2011]. Malthus, S., 2004. International Convergence of Financial Reporting Standards. Working Paper Series No. 1/2004. Nobes, C. and Parker, R., 2002. Comparative International Accounting, 7th edition. Essex: Pearson Education Ltd. Paul, J., 2010. Conceptual Framework: The Reporting Entity. AASB 9-10 June 2010 Agenda Paper 10.2. Peel, R. & Et. Al., 2008. Achieving Agility through Alignment. Oracle Corporation. [Online] Available at: http://www.oracle.com/us/solutions/ent-performance-bi/agility-through-alignment-bws-068280.pdf [Accessed August 27, 2011]. Pitt, H., 2002. US Shares Common Aim for One Set Of Standards. Accountancy, 130(1311), 1. Ramanna, K. & Sletten, E., 2009. Why do Countries Adopt International Financial Reporting Standards?. Harvard Business School Working Paper 09-102. Sawani, A., 2006. The Changing Accounting Environment: International Accounting Standards and US implementation. Journal of Finance and Accountancy. The State of Queensland, Queensland Audit Office, 2003. Applying International Financial Reporting Standards to the Public Sector. Publications. [Online] Available at: http://www.qao.qld.gov.au/downloadables/publications/ifrs/applying_ifrs_faqs_dec_2003.pdf [Accessed August 26, 2011]. Read More