Potential Benefits of Adopting the IFRS in Australia - Coursework Example

Number Potential Benefits and Negative Impacts of Adopting the IFRS in Australia Introduction International Financial Reporting Standards are becoming the international standard in the financial statements’ preparations. More than one hundred and fifty countries have already adopted the standards as accounting standards while most happen to be on the way to adopt them. As the adoptability of the International Financial Reporting Standards across the globe is wide, it means that there are benefits in the adoption of accounting standards. Australia is one among the nations that have adopted the IFRS. The country has adopted the standards since the 1st of January 2005. The IFRS adoption move was encouraged by the 1995 European Commission’s report considerations (Accounting Harmonization: New strategy with regard to global harmonization), however, it resulted from some more far reaching program for corporate reforming that was introduced by the government of Common Wealth under sponsorship of CLERP (The Cooperate law Sponsorship Program). The major aim for adopting the standards for Australia was to enhance information quality on corporate performance. This paper looks at the benefits resulting from the adoption of the standards as well as any challenges, negative impacts or limitations that the country has faced in the implementation as well as maintenance of the International Financial Reporting Standards in Australia. Potential Benefits for Adoption of IFRS in Australia Consistency- change IFRS will provide many bonuses to Australian companies. Among the most beneficial areas for adopting IFRS is uniformity. Consistency happens to be the major reason why most companies as well as nations are currently adopting IFRS. In simple words, Australia’s adoption of IFRS provide the companies within the country internal uniformity, something, which reduces cost of reporting (Anna, 2013). As the key aim for IFRS is uniformity, it places every person within a similar level globally as far as preparing financial standards is concerned. For Australia, this will enable firms to display financials at some similar levels as their international competitors. Better Capital Markets- through the adoption of IGRS, Australian companies are place within the international market place. His helps in the promotion for new trade as well as well as assessing capital markets. Companies within the country will have a chance of being recognized to be an international player within the capital market (CYNTHIA, 2009). Improved international communication- adoption of IFRS by Australia will ensure reliable financial reporting. As a result, Australian large companies will be apply procedures that are standardised, same as their affiliates internationally. This is vital in improving decision-making, internal communication as well as quality reporting. Easy performance appraisal- through increasing competitive markets, the International Financial reporting Standards will make it possible for companies in Australia to stand out amongst their competitors within the always-competitive capital markets (Australian Institute of Company Directors (AICD), 2005). In addition, it will make it possible provide investors with the chance to evaluate the performance of companies with an aim of staying at par with international competing companies. The adoption of IFRS could appear to be a bit different, particularly in the case of deferred taxes, business combinations, employee benefits as well as financial instruments. Additionally, both internal as well as external reporting features must be set up to make sure of smooth transition (Harri, 2011). In general, it is encouraged that IFRS adoption in Australia will result to: greater understanding as well as transparency, lower capital cost for Australian firms and higher prices for shares. This will be made possible through the greater confidence of investors as well as transparent information in accounting (Business Teacher, 2015). In addition, there will be reduced nation-wide standard setting costs, eased security markets regulation, assessor investment opportunities and easy financial data comparability even outside Australian borders. Australia will enjoy increased credibility for local markets to external capital providers as well as potential external merger partners and to possible lenders for financial instruments within the country. Adoption of IFRS in Australia will still make it possible for easier global mobility for Australian professional personnel across national boundaries. Multi- national companies within the country will be assisted by the adoption to fulfil the requirements of stock exchanges throughout the world (Ann, 2015:p 2). Other benefits will include lower vulnerability to pressures related to politics compared to national standards, continuance local implementation management for local circumstances as well as a tendency to rise standards of accounting to most high level of quality possible. Through IFRS adoption, there is a trade-off for possible gain from its ability to in influencing setting of international standard value lost from a local authority surrendering over standards of accounting (Karthik & Ewa, 2009: p. 9). Adopting IFRS will benefit Australia if it is the will of the country to fit in the international market. More financial statements/ report’ preparers, users as well as auditors in the country will familiarise themselves with a set of accounting standards common to the rest of the world, than with Australia’s general accepted accounting principles (Richard, 2014,p 153). This means that as business expands outside the borders, job opportunities as well become available across borders. They will be able to access job opportunities at international standards in terms of remuneration and working conditions. If the adoption of International Financial Reporting Standards is expected to bring down costs of information to capital markets, Australia is expected to trade more on such economic benefits since it highly depends on foreign trade as well as capital (Brades, 2012). Similarly, foreign trade happens to be a significant part of the Australian economy hence adopting the accounting standards that are common internationally will make it possible for the country to increase share of foreign capital as well as trade within the county’s economy (expected involvement of foreign nations within Australian economy will make the IFRS adoption more attractive. This means that the country will have higher chances for growth in similar factors) (Karthik & Ewa, 2009: p. 10). Potential Negative Impacts/Limitations that Australia Could Face Resistance- Resistance to the adoption has been a major challenge. This was brought about by the fact that the department of treasury in Australia did not consult widely with academia as well as business interests or even key financial organizations in some wide fundamental as well as far-reaching reform proposal (Stewart & Alison, 2006: p631). Despite the fact that the adoption has been endorsed by the key accounting bodies, general opposition is being faced from numerous businesses, academic as well as professional interests. Most of such concerns relate to possible loss of autonomy as well as legality within global standard setting as well as the wide spread that the Australian local Accounting Standards happens to be of better quality compared to International Financial Reporting Standards. Another thing is that most of the benefits of adopting IFRS that the government proposed within its CLERP creativities, for instance enhancement of capital markets access, enhancing communication with investors, cost of capital reduction, and improvement of accounting standards ‘ quality have been highly questioned. Prematurity- with Australia adopting the IFRS, it is important that the larger community of the world has adopted the same standards too. It is perceived that the IFRS equivalent standards’ rapid adoption program of Australia could be untimely or premature if the other key capital markets, for instance the United States, fail to follow suit. The United States yet has no adopted the IFRS not forgetting that there are other nations as well holding out. This may make it difficult or even too much of Work for Australian companies that operate within the United States for instance, to prepare their financial statements using the International Financial Reporting Standards as well as once more preparing them utilizing the American Generally Accepted Principals of Accounting (American Institute of Certified Public Accountants, 2015). It is not certain how long his problem will be a challenge; however, it depends on how first the IFRS will take to be adopted all over the world. Despite the fact that adoption of IFRS as the world’s accounting standard is widely being adopted by many nations, some countries that have not yet adopted the standards may decide not to take the initiative hence this problem may become a long life problem. Lack of Knowledge of IFRS- (Stewart & Alison, 2006) argue that most accounting professionals in Australia lack knowledge of IFRS. According the survey they conducted, most accounting staff have fair or poor knowledge on IFRS (p 637). The further argue that only 30 percent were rated as having excellent Knowledge of IFRS. This is a big challenge for Australia in its adoption for IFRS since without Knowledge then it is not possible to apply the standards. This may as well lead to resistance towards adoption of the standards something further contributed to by the fact that training is costly. Bong large as well as small companies are impacted by this similarly. Small companies within Australia lack too many resources at their disposal for implementation of such changes as well as staff training. They will be forced to ship in accountants as well as other outside consultants for assisting in facilitating the changeover (Rajendra, 2015). This might be very costly for them. Manipulation- IFRS could be subject to manipulation. This is due to the fact that there happens to be a problem of flexibility that is allowed by IFRS. This could be a major challenge to Australia as application f IFRS in preparation of Companies’ financial statements is concerned. Australian companies could utilize only those methods that they wish to, making it possible for financial statements to reflect the desired results only. Such a thing may result to a profit or revenue manipulation, may be utilized in hiding financial constraints within the company, as well as may encourage fraud. A good example would be changing of the inventory valuation approach could bring about higher incomes for the present period’s profit and loss statement. This will make the firm to look more profitable than it really is. This might lure Australian investors into investing in the wrong companies then losing their investment later. On the other hand, Australian companies to show less profits hence end up paying lesser taxes might use such manipulations. While IFRS does require that changes within application for the rules have to be justified, it might be frequently possible that Australian companies invert reasons to make such changes. This is a big challenge and Australia would be needing stricter rules to make sure that companies do value their statements similarly (Angie, 2015: p 1). Cost and Complexity in Implementation- just as cost of implementation for IFRS will be too high for Australian companies; same applies to the complexity of implementation. First of all is education since the companies must have greater Knowledge on IFRS. Another thing is that given the possibly greater consequences of economy as well as technical challenges that in relation to the implementation of IFRS for bigger firms, it is expected to be quite expensive. This is based on the number of functions, responsibilities as well as departments most likely to get involved with the implementation of IFRS within the company (Shafiquiu, 2014). These include the department of investor relations (for communicating with economic as well as financial reporting impact for changes in IRFS to the investors as well as capital market). Department of Information technology (given that there is a likely hood that technical implementation for IFRS within huge companies would be very complex as well as extensive, possibly demanding for new upgrade as well as modifications in the accounting systems). Finally, external auditors (as there could be extensive as well as involving verification/assurance procedure of IFRS financial reports for larger firms) (Angie, 2015). It is by great extent that the companies’ directors, CEOs accounting as well as finance divisions and finally the executive committees for compensation will be involved within implementation of IFRS and only this shows the complexity as well how costly the whole exercise will be (Stewart & Alison, 2006: p 634). Conclusion Financial Reporting Council’s decision for adopting IFRS in Australia as the local accounting standards provoked spirited debates within the country. Most of the concerns related to potential loss of the legitimacy as well as autonomy within the global setting as well as the widespread perception that the new global standard was inferior to local accounting standards used within the country before the 2005 adoption of IFRS. In addition, there were arguments that the benefits that were being stated by CLERP about adoption of IFRS has been largely challenged by within published literature. On the other hand, most of such literature happens to be analytical or anecdotal according to Stewart & Alison (2006). It was due to such matters among others that there was a lot of resistance towards implementation of IFRS in Australia. Additional resistance was brought about by other challenges that involved the implantation of the reporting standards. These included high costs of implementation such as training staff. Another thing is that most accounting professionals were familiar with standards generally accepted for accounting purposes in Australia. The country as well faces other challenges as a result of adopting the standards such as prematurity since important economies within the global market such as the United States have not yet adopted the uniform standards. On the other hand, there are plenty of benefits that accrue from the country’s adoption of the standards. These include uniformity in information, which is important in making the country compatible with other countries in the international economy. Another thing is that there are plenty of opportunities brought about by the adoption, which include lowering costs of information to capital markets. The adoption will make it possible for the country to increase share of foreign capital as well as trade within the county’s economy (expected involvement of foreign nations within Australian economy will make the IFRS adoption more attractive. This means that the country will have higher chances for growth in similar factors). Other benefits include job opportunities for accounting professional in the global level as they familiarize themselves with the uniform standard. There are plenty of benefits expected to accrue fronm the countries adoption of the International Financial Standards, but on the oother hand, it has been evident that challenges are there which make the adoption a little difficult. The main challenges are costs to be incured and this is heavy enough for both lage firms as well as small business. Tis is because small businnesses have little resources at their disposal while large companies the implimentation is deep and complex. References Business Teacher, 2015. History Of Australias Policy Before The Adoption Of Ifrs. [Online] Available at: http://www.businessteacher.org.uk/essays/accounting/history-of-australias-policy-before-the-adoption-of-ifrs.php [Accessed 6 5 2015]. AASB , 2004. First-time Adoption of Australian Equivalents to International Financial Reporting Standards. ACCOUNTING STANDARD, p. 71. American Institute of Certified Public Accountants, 2015. INTERNATIONAL FINANCIAL REPORTING STANDARDS. [Online] Available at: http://www.ifrs.com/updates/aicpa/ifrs_faq.html#q3 [Accessed 5 5 2015]. Angie, M., 2015. International Financial Reporting Standards - Advantages & Disadvantages. Chron, p. 1. Anna, J., 2013. Advantages and Disadvantages of IFRS compared to GAAP. [Online] Available at: http://research-methodology.net/advantages-and-disadvantages-of-ifrs-compared-to-gaap/ [Accessed 6 5 2015]. Ann, T., 2015. The Case for Global Accounting Standards: Arguments and Evidence. Academic Fellow - Research, IFRS Foundation1, p. 16. Australian Institute of Company Directors (AICD), 2005. Time for a rethink on IFRS Accountancy. [Online] Available at: http://www.companydirectors.com.au/Director-Resource-Centre/Publications/Company-Director-magazine/2000-to-2009-back-editions/2005/July/Time-for-a-rethink-on-IFRS-Accountancy [Accessed 6 5 2015]. Brades, 2012. Adoption of Ifrs in Australia - Essay. Study Mode, p. 8. CYNTHIA, B.-L., 2009. Highlights of IFRS Research. Jounal of Accountancy, p. 1. Harri, D., 2011. Benefits Of Adopting IFRS. [Online] Available at: http://benefitof.net/benefits-of-adopting-ifrs/ [Accessed 5 5 2015]. Karthik, R. & Ewa, S., 2009. Why do countries adopt International Financial Reporting Standards?. p. 46. Rajendra, S., 2015. Advantages and Disadvantages of adopting IFRS. [Online] Available at: http://taxclick.org/type/ifrs/advantages-and-disadvantages-of-adopting-ifrs [Accessed 5 5 2015]. Richard, D. M., Sidney, J. G., Joanne, P. & Sally, A., 2014. Preparers Perceptions of the Costs and Benefits of IFRS: Evidence from Australias Implementation Experience. 28(1), pp. 143-173. Shafiquiu, 2014. What are the strengths and weaknesses of adopting IFRSs in Australia?. [Online] Available at: http://www.enotes.com/homework-help/what-streanths-weaknesses-ifrs-australia-469216 [Accessed 6 5 2015]. Stewart, J. & Alison, D. H., 2006. Australia’s switch to international financial reporting standards: a perspective from account preparers. Accounting and Finance, Volume 46 , p. 629–652. Read More