International Finances - Mackintosh Speech - Essay Example

International Financial “Answer to Part A” Mackintosh started his speech at the IFRS Foundation conference in Johannesburg mirroring the hard lessons learned from the recent international financial meltdown. Mackintosh told that initiative to accomplish international accounting standards was started in 1973 with the establishment of the International Accounting Standards Committee (IASC) which was mainly intended to minimise the differences in the national accounting standards against the globally agreed benchmarks. After the lapse of twenty-five years, the accounting standards of those nations stayed as inconsistency as ever and to our dismay, none of these nations have demanded the usage of international standards. This is because each nation has adopted only some portions of the international standards of their choice and as recommended by their home standard-setting board. As different nations adopted different parts of the international accounting standards that were adhering with their home nation standard-setting body and hence, international comparability cannot be carried out. To drive out anomalies due to inconsistencies, the IASC was reorganised as IASB, and its sole aim is to establish a uniform accounting standard to be perused by all the nations without any deviation (Deloitte 2014). He cited that how both Japan and India allowed to use IFRS on a voluntary basis whereas the Japanese government encouraged prominent usage of IFRS. Those Chinese companies that had dual listings in Hong Kong are using full IFRS for their financial reporting. “Since 2007, U.S.A permitted non-US companies to use IFRS reporting” (Deloitte 2014). He buttressed the mutual reliance and interlinks between economies and added that in the post-crisis background, all policymakers are now able to understand how each national capital market around the globe , even the giant , acts as just like a satellite of the international financial system. He further observed that presently, about 33% of all the financial investments are global transactions in nature. According to him, about 81% of the nations which took part in the survey prefer or mandate the usage of IFRS for either the majority or all the public companies. Further, the majority of the remaining nations that have yet to mandate IFRS in home nation, including Japan, India, U.S.A and China, but these nations are permitting IFRS usage in some scenarios. Mr. Mackintosh highlighted that the ISAB’s high-standards have been already approved in various economies as it is being used by more than a decade. Mr. Mackintosh is of the view that IFRS standards should be implemented in whole and without any changes to derive full advantages from it by each nation, which adopt it (Deloitte 2014). Statistics show that ISAB is in force in more than 100 nations as of now, which is strong evidence that show how international standards are not only preferable but also achievable. As economic globalisation is continuing to spread, this makes IFRS adoption as a compelling need within the enduring jurisdictions. According to Paul Volcker, renowned Chairman of the US Federal Reserve, the time is not far away that all jurisdiction will implement IFRS global standards very soon. Nonetheless, even very giant countries like U.S.A are yet to resolve how to commit to IFRS and the choices by the policy makers in those nations are predominantly decided by their perspectives on the viability of international accounting standards (Deloitte 2014). Mackintosh is of the opinion that those nations which follow the irreconcilable national accounting standards will have to suffer from incurring some additional cost of compliances, translation risk and complexity to corporate and investors functioning in the contemporary international marketplace. Mackintosh explained that there is a vast difference between adoption and convergence of IFRS. Adaption requires the application by a jurisdiction of IFRS in whole (Deloitte 2014). As per Mackintosh, IFRS has achieved some triumph and at the same time, some failures also. Both the US and the IASB have made a success in aligning the desperate needs, such as in fair value measurements, in the accounting for business mergers and of late, in the all –significant Revenue Recognition project. As per Mackintosh, these accomplishments cannot be bypassed as they have enhanced the comparability and eminence of financial data around the globe. Thus, this corroboration demonstrates that international standards are not only accomplishable and desirable but also unavoidable. Nonetheless, in convergence, there were some failures in some significant areas such as the netting of derivatives, the financial instruments projects, the taxonomy and evaluation of financial instruments and provisioning of loan losses (Deloitte 2014). Even small variances in accounting requirements can have a major impact on reported financial performance. The countries around the globe require to repose confidence in the processes of IASB, its outreach and judgement to guarantee that the required quality is offered. The establishment of IASB in 2001 with an aim of establishing a unique set of international standards offered the G4+1 members with a mechanism to facilitate them to cease meeting separately and to extend their whole-hearted support and to donate their collective resources into the IFRS project. The disbanding of G4+1 in 2001 was very much effective as prolonging the functions of the G4+1 might distract the resources which would be otherwise available to strengthen the initiatives of IASB to accomplish convergence of accounting standards globally. For the success of IASB, the magnitude of cooperation with jurisdictional officials has been a chief factor and its capabilities to offer all feasibility with a high eminence standard that can be extended on an international basis and that too on a consistent basis. There is a strong need to implement uniform global accounting standards like IFRS as it will enhance the transparency and comparability of financial data and minimise preparation costs of financial statements. Capital market participants around the world will have high-quality data and can make informal investment decisions if a single, globally approved accounting standard is applied constantly and rigorously. With a strong global accounting standard, markets are able to assign funds more prudently and companies can accomplish a lower cost of capital. Thus, a high quality of standards can enhance the comparability and quality of financial reporting and hence, indorse the development of the assimilation of international capital markets and the development national capital markets. In nations where IFRS is compulsory, the investors are being benefited mainly through the minimised cost of capital due to enhanced disclosures and improved data comparability if backed by strong legal enforcement. Further, IFRS has helped to encourage to infuse more foreign equity investments by individual investors provided if there are adequate legal norms, and enforcements are there in those nations. In those nations, where IFRS is made mandatory, it is observed that it offers immense advantages to security analysts. Security analysts who are evaluating the IFRS adopted companies have higher accuracy as compared to those companies which have not espoused IFRS. Thus, IFRS has enhanced the information atmosphere by augmenting the comparability and quality of the information. IFRS is being considered as a medium through which the nations can augment protection to investors and develop their capital markets more reachable to foreign investors. World Bank is also encouraging the nations to which it extends its support to embrace IFRS. Many developing nations such as Korea have adopted the full IFRS on a mandatory basis in an effort to enhance transparency and international conceptions of its corporate culture so as to attract large quantum of foreign direct investment. In the year 2012, Malaysia adopted the full IFRS which facilitates the companies and markets in Malaysia to be recognised globally (Deloitte 2014). It is to be noted that even in those nations where there exists strong investor protection mechanism, espousal of IFRS helps to achieve high quality of financial enforcement and reporting. Under IFRS, capitalisation of intangibles offers value relevant data information for companies functioning from New Zealand, Hong Kong and Australia. IFRS offers better comparability of policy preferences for goodwill and deferred tax for companies from” Hong Kong, U.K and Australia”. Conclusion Mackintosh has raised the query, whether a single set of international accounting standards is accomplishable globally? Is it feasible to establish an international language of financial report so that it can be applied on an international level continuously in each and every nation on the globe, despite the fact whether it is an advanced economy or developing economy? Espousal of IFRS on a global level is yet to be made. Further, the quality of IFRS has been improved in the last one decade, and it is now being used by both developing and developed nations. Those jurisdictions that have not mandated the usage of IFRS, are started to use IFRS. Mackintosh is of the opinion that full convergence can probably never be accomplished and hence espousal of IFRS is the only viable answer to accomplish global accounting standards. “Answer to Part B” IAS 38 deals with the accounting of intangible assets. As per IAS 38, an intangible asset is one which is” a recognisable non-monetary property without corporeal substance”. Thus, the following three conditions should be satisfied for an asset to be eligible as the intangible asset under IAS 38 namely a) they are properties – resources controlled by a business from which future economic advantages, are anticipated to arise to that business, b) they are in corporeal form or do not have physical substance and c) they are recognisable or identifiable in nature. A major issue arises with intangible assets is that of vagueness as regards to future economic advantages which emanate from expenditure of this kind. Thus, the uncertainty pertains to both to the future economic advantages emanating from such intangible assets and bar the access of others to those advantages. For instance, if a business imparts training to staff with an aim to enhance its operations and finally to improve its top-line. Nonetheless, such improvement cannot be taken as granted as the staff may leave the organisation in the near future along with improved efficiency acquired in the organisation. Likewise, advertising expenses incurred by a company to generate future sales. However, long-term impacts cannot be measured from such expenses and are not under the control over the business. Recognition Criteria The recognisable trait of the definition of an intangible asset is certain when it is distinguishable (capable of being distinguished from the business and can be disposed of, leased, rented or licensed) or when it emanates from other legal or contractual rights. This trait is essential to differentiate intangible assets from the goodwill. An intangible asset’s useful life can be indefinite or definite. From the anticipated cash flow streams connected with the asset, the useful life of the intangible assets is normally evaluated. Under IAS 38, an intangible asset is one, which is having an infinite useful life when there is no predictable restriction during the period over which the asset is anticipated to create inflows of net cash for the business. Thus, under IAS 38, now it is feasible to recognise intangible assets without having to depreciate them at all (Alexander, Britton & Jorissen 2007:290). IAS 38 inflicts many criteria that limit capitalisation of internally established intangible assets. “As per IAS 38.71”, a business is barred from employing retrospection to arrive at a conclusion retrospectively that the recognition yardstick are met, thereby capitalising an expense which was accounted as an expense earlier. IAS-38 lists out criteria, all of which, must be met so that a development cost could be capitalised. So as to capitalise the development costs, a business should be able to validate all the following points; a) The technical viability of completing the intangible asset so that it can be offered for sale or use in the future. b) The main aim is to complete the intangible asset and then, either sell or use it. c) Its capability to sell or use the intangible asset d) How the intangible asset likely create the future economic advantages e) The availability of necessary financial, technical and other resources to carry out the development and to sell or use the intangible asset. f) Its capability to evaluate reliably the expenses attributable to the intangible asset during its development (Epstein & Jermakowicz 2008:163). Initial measurement In case of first-time adopters of IFRS, for the purpose of initial measurement, the business should be cautious that, in applying retrospectively the IAS 38 as at the date of changeover, it should not capitalise costs sustained well before the standard’s recognition yardstick were coped with. Hence, for the first-time adopter, it is only allowed to capitalise the costs of internally established intangible assets when it: a) Footed upon the evaluation and documentation at the time of that conclusion , that it is feasible that economic advantages are likely to accrue from the asset which will flow to the business; and b) Has in force, a consistent system of building up the costs of internally established intangible assets when, or likely after, these costs are incurred (Gruber 2014:65). In simple words, it is not allowed under IFRS 1 to restructure retrospectively the costs of intangible assets. If an internally established intangible asset eligible for recognition at the date of transition, it is then recognised in the entity’s opening IFRS statement of financial position even if the associated expenses were incurred under the earlier GAAP. Further, if the asset does not eligible for recognition under IAS 38 until a later date, the aggregate of the expenses incurred from that latter date will be regarded as its costs. Nonetheless, for the first-time adopter of IFRS who failed to capitalise the internally established intangible asset which is not likely to have the kind of system and documentation needed by IAS 38 and hence, incapable of capitalising the same in its opening IFRS statement of financial position. Thus, for the first-time adopter of IAS, there is a need on their part to introduce internal procedures and systems that facilitate it to decide whether or not any future internally created intangible assets need to be capitalised as in the case of development costs. Where for the first-time adopters, the amortisation rates and methods under earlier GAAP are acceptable under IFRS, then, there is no need on the part of the business to restate the accumulated amortisation in its openings IFRS statement of financial position. In its place, if the business accounts for any transformation about the projected useful life or amortisation design probably from the period when it makes it change in its estimate. If the business’s amortisation patterns and rates under earlier GAAP vary from those acknowledgeable under IFRSs and those variances have a substantial impact on the financial reports, the business would fine-tune the accumulated amortisation in its opening IFRS statement of financial position. The useful life and the residual value of an intangible asset should be assessed at the close of the each financial year which is not needed under the earlier GAAPs (Ernst& Young 2015: chap 7). “Answer to Part C” It is assumed that there is no salvage value of machinery at the end of the life of the machinery (at the end of the fourth year). Depreciation has been provided on the basis of straight-line method. Note A: As per IAS 16, all expenses spent to bring an asset to its current place and condition for its envisioned usage should be capitalised. Section 319 TCA 1997 does not permit any VAT paid by a business for the purchase of a machinery to be included in the qualifying expenditure for capital allowance purposes where that cost is to be recovered in the guise of a VAT credit. The company should record abnormal spoilage that is not connected to the requirements of a specific machinery to a separate abnormal cost account. Hence, abnormal electrical power outage costing of £20000 was excluded from the cost of machinery £20,000 Note B “Under IAS 16.15, a machinery should be recorded initially at cost. The cost of the machinery includes all costs which are essential to bring the machinery to working condition for its intended usage. Thus , as per IAS 16.17, cost of the machinery would include not only its invoice price but also will include cost of delivery and handling the machinery , the cost of site preparation , installation costs , professional fees incurred for engineers and architects and also the projected cost of dismantling and removing the machinery and restoration of the site (Christian & Ludenbach 2013:38).. The present value of estimated cost of dismantling and removing the machinery of £ 250,000 is calculated on the basis that £1 at the end of 4 years is worth approximately 68p today. Hence, the estimated of cost of dismantling and removing the machinery was arrived at £ 170,000. Note C Under IAS 16, the cost of major overhauling of an item happening at regular phases over the useful life of the machinery is to be capitalised to the magnitude that requires the recognition yardstick of an asset (Epstein, Jermakowicz 2008 :4). Hence, the overhauling expenses of £ 1 million have been capitalised after 2 years. List of References Alexander, D, Britton, A, Jorissen, A. (2007) International Financial Reporting and Analysis. New York: Cengage Learning Christian, D & Ludenbach, N. (2013) IFRS Essentials London: John Wiley & Sons Deloitte. (2014) IASB Vice-Chairman Calls “Global Accounting Standards “inevitable [online] available from < http://www.iasplus.com/en/news/2014/08/mackintosh> [accessed 11 May 2015] Epstein, B, J & Jermakowicz, E K (2013) Wiley IFRS 2008: Interpretation and Application. London: John Wiley & Sons Epstein, B, J & Jermakowicz, E, K. (2008) IFRS Policies and Procedures. New York: John Wiley & Sons Ernst & Young. (2015) International GAAP 2015: Generally Accepted Accounting Principles. New York: John Wiley & Sons Gruber, S. (2014) Intangible Values in Financial Accounting and Reporting. London: Springer Read More