IFRS Financial Statement - Transform Group - Case Study Example

Transform Group which is looking towards adopting the IFRS and moving away from the UK GAAP will find it easy to improve the reporting pattern. This will help Transform Group to ensure that a single set of accounting standard followed by different world bodies multiplies the credibility of reporting and will help Transform Group to ensure better results. To be able to garner maximum benefit Transform Group needs to under the model of IFRS and look towards a proper transition method which will ensure growth and better financial reporting for Transform Group Different world bodies have worket to create an accounting standard which is universal and based on a single set of accounting standards. IFRS is one international standard in that direction. To ensure effectiveness and clarity it is important that the world capital markets are able to clearly indicate the economic performance and having a single IFRS will make it easy to take a step in that direction. The manner in which IFRS has evolved and developed has ensured that it provides certain benefits in adopting IFRS in comparison to GAAP. The benefits for Transform Group by adopting IFRS are as follows Firstly, IFRS enables worldwide comparability as having a single standard will ensure that all world markets highlight the same quality (Adopting IFRS, 2008). This will ensure easy comparability between the world markets and will help to improve the capital market allocation which is lacking in case of GAAP. This will ensure that foreign investors are able to understand the credibility of local markets. This will have a positive effect and make it possible for companies to be listed in the foreign exchanges and ensure better comparability and standards matching international requirements. Secondly, using an international standard like the IFRS will ensure that companies don’t have to follow the local standards (Adopting IFRS, 2008). This will help companies to prepare financial statement using formats prescribed by the IFRS and will not have to follow the local GAAP. This will reduce the burden on the financials of the company and will ensure better financial presentation of data. Thirdly, using IFRS will help companies to ensure that the cost of raising capital is reduced substantially (Adopting IFRS, 2008). Companies having an international standard will be able to ensure that they raise capital overseas as similar standards will help organizations to understand the value and importance of financial records and raising capital will become easy in comparison to following different GAAP in different countries. Fourthly, IFRS will help businesses to have a single set of books as using different GAAP will make businesses have different set of books for different countries (Adopting IFRS, 2008). This will make understanding difficult and will result in creating discrepancies as businesses will be unable to understand the different aspect of business which will help them in ensuring proper growth and proper financial management. Fifthly, an important consideration from the point of reporting is that IFRS uses recent developments and international standards. Since, the local GAAP is outdated so using IFRS will help to enhance the value of reporting. This will help businesses to ensure that reporting provides complete knowledge and information pertaining to financial data. This will help businesses to be able to gauge the productivity and efficiency of other companies and based on it take future decisions. Sixthly, IFRS will also ensure better coordination and movement of auditors and accountants as having a single standard will ensure that the books of accounts can be verified and complete truth regarding the accounts can be found out. This is not the case while using local GAAP as each standard has a different set of rules and regulations so it becomes difficult for an accountant to ensure the validity and reliability of information published in the financial reports. IFRS thereby provides various benefits to companies using the international standard as it helps to improve the reliability, comparability and authenticity of financial records. Businesses using older and traditional accounting standards looking to implement the IFRS have to go through a transition process that will help in the successful implementation of IFRS. Companies looking to implement the IFRS thereby need to understand the process and the timing of the transition so that maximum benefit can be yielded from the IFRS. Transform Group which is looking towards moving towards IFRS from the traditional UK GAAP standard applied by them have to ensure that the transition is effective and ensures maximum growth for their business. Since, Transform Group has a lot of tangible assets in their financial statement special care and attention should be devoted to ensure that the transition is effective. Under the IFRS accounting standard Transform Group should look towards using exit price accounting theories as it will ensure that the transition is complete and reflects the true value. The methods that can be used are as Measurement after recognition: This method states that “assets should be reported at cost after depreciation has been accounted for helping to match the CCA as it reflects the true value”. (IFRS, 2004) This will help to ensure that the reporting of intangibles is true and the exit point of the intangible after which it will be removed is ascertained with conformity. Amortisation over useful life: This method states that “assets which are intangible in nature are amortised over the life of the assets”. (IFRS, 2004) This helps to ensure that cost that needs to be incurred. Also since, the estimate life is ascertained on the basis of contract or an agreement so reporting of intangible based on it helps to provide a true value. Retirement and disposal: This method states that “intangible needs to be removed from the Balance Sheet at the point when the future earning capacity based on those intangible is lost”. (IFRS, 2004) This helps to ensure that the value of only those assets are realized which is separable and can be measured with ascertained. This thus helps to report the intangible assets correctly. Using a mixed measurement system in IFRS ensures that relevant and valuable information is accounted. It thereby helps to predict the future earnings properly and based on it the speculation which a business encounters can be minimized. This will help to devise a strategy where the business units are able to integrate the future uncertainties. This will thereby benefit Transform Group and ensure proper reporting and comparability among business firm. The process of transition to IFRS and IFRS 1 provides the suitable means through which the transition and adoption of IFRS becomes easier for companies. The most important part for first time adoption of IFRS is that the user has to adopt each version of the IFRS and report for each transition retrospectively for the previous years (Brice, 2010). The IFRS 1 governs the manner in which the internal statements will be converted so that it has applicability to IFRS. The IFRS 1 presents the different disclosure that the financial accounting system has to ensure so that the transition to IFRS is appropriate (Adopting IFRS, 2008). The process mainly requires the transition of equity, income and cash flows to match the requirements of IFRS standards. IFRS 1 thereby helps business units looking towards a transition as it makes the adoption of IFRS easier. IFRS 1 also ensure that limited exemption with regard to retrospective effects is provided especially in situations where the cost would exceed the benefits for the business. This also ensure that IFRS 1 rejects retrospective effect of required judgement especially where the past economic conditions and environment is to be looked into. Since, it is impossible to understand the retrospective effect for those transactions so IFRS 1 prohibits the transition for such transactions (Audit & Assurance, 2003). IFRS 1 also signifies a list of exception making transaction for the first time users. They are divided into mandatory and optional exceptions. This list has been divided into two lists on the base that transactions where the cost exceeds the benefits are not accounted through the retrospective effect and only transactions which will ensure proper retrospective effect after considering the different business effects are looked into. This can be understood by an example where under GAAP the assets are showed at a value less depreciation but using the IFRS standard those assets will be shown at the current value which the assets deem to have which will increase the importance of the transition effect and need to account for the changes retrospectively so that the value of depreciation is accounted for. FASB’s approach proposes that all financial instruments be reported at fair value, including bank loans and deposits, while the IASB seeks to retain some of the existing financial instruments accounting model that used a combination of fair value and amortized cost, depending on the nature of the financial instrument. This thus helps to ensure that the instruments are reported at a correct value. The AASB approach deals with the mixed measurement system in a different manner. It states that “assets should be recognised at a value which is realisable and should be identifiable, liabilities should be assumed and any non controlling interest should be accounted for”. (AASB, 2008) This thereby helps to ascertain the value of instruments correctly and also integrates all the different measures possible. An important fact to consider here is that it helps to find out the reason for holding such an instrument. Since, it helps to differentiate the speculative one so it helps to ascertain the reason for holding one. The reason could be either business or economic reasons for holding an instrument. Using the mixed measurement system ensures that net income is kept free from the movements of financial instrument. This could have an effect on the profits as the instrument could be held for speculation keeping in mind the long and short term trading movements. This is thereby helping to keep the movements away from the regular income. Using a mixed measurement system in IFRS and AASB ensures that relevant and valuable information is accounted. It thereby helps to predict the future earnings properly and based on it the speculation which a business encounters can be minimised. This will help to devise a strategy where the business units are able to integrate the future uncertainties. This increases the complexity for organizations as estimating the correct and fair value of the asset at the date of transition becomes a problem. Despite the problem it provides various advantage as it ensures that the retrospective effect which tends to increase the value of the asset results in more cash flow for the business which will thereby ensure that the cash management for the business improves (Transition, 2008). This thereby helps to ensure that the breaches are reduced to a large extent and businesses on the backdrop of it are able to benefit greatly and ensure proper mechanism of proper accounting standards. IFRS 1 thereby generally helps organizations to simplify the process of transition and ensures that the company is able to be guided through the process of transition. This will help to simplify the process of use of IFRS and ensure that the business is able to use an international accounting standard which is readily acceptable by all. The different accounting standards and principles also results in different treatment between different accounting practices. Significant differences are being witnessed between the treatment of different transactions under the UK GAAP and IFRS rules which results in creating different effects on the financial statements and organizations using different standards needs to identify those. A major difference which will be seen in the accounting under UK GAAP and IFRS is that IFRS doesn’t permit the use of last in; first out inventory management system by UK GAAP allows it (Conversion, 2007). This will result in large scale discrepancies in the financial figures under both UK GAAP and IFRS as accounting for closing stock will be different This will result in the presentation of financial information to be different. Using different methods of treatment for closing stock will also have a bearing on the profits and the overall structure that the financial statement looks to project. This will result in the financial transactions to be recorded differently and will result in discrepancies in the financial figures. With regard to the investments made in financial assets the treatment is different. Investments made in financial instruments like equity which are not listed require being treated differently under UK GAAP and IFRS. Under the UK GAAP the investment is denoted at the cost price whereas under the IFRS the unlisted equity shares have to be recorded at fair value (IFRS, 2008). This two accounting standards thereby has a difference in accounting the different transaction. This will result in widespread discrepancies as the fair value of the security is bound to be different from the cost of the security. This will result in the value to be either under or over estimated. The wide scale differences will thereby project different figures for the financial statement and based on it the final value of the asset and liability will be different thereby making differences being accounted while using the UK GAAP and IFRS standards. Another contrasting difference between the manner in which transaction are recorded under the UK GAAP and IFRS is the manner in which assets are valued so that the expected return on the plan asset can be ascertained is different. The problem compounds in case of intangible assets as the manner of recording it in the financial statement is different. Having a different mechanism to value the assets and the expected income based on it creates a difference between the estimated earnings and results in the expected return to be different. This could affect the business as it might lead to a situation where the difference in return results in a particular asset to be used or not and also determines whether accepting the project based on the return for the asset is justified or not. Business unit, thus need to realize the importance of identifying the use of correct accounting standards so that the reporting is correct and can be validated. It is important that a clear accounting standard is followed and using the IFRS will ensure that there is no manipulation in the financial statement and it provides a better picture. It is important IFRS is used in such a manner that the transition phase records all the changes retrospectively. Business needs to be aware of those and use which helps to represent the correct picture. For this it is important that the value of the assets and liabilities is ascertained correctly and can be separable. IFRS has incorporated a measurement system by bringing the necessary change in the manner it was reported so that validity and reliability of the information increases. This helps to ensure that even the smaller minute details with regard to financial instruments are accounted for. This thereby helped to present the financial information which is true and correct and ensure that IFRS increases the reporting pattern. References Adopting IFRS, 2008. Preparing your first time IFRS financial statement. IFRS Readiness Service. Price Water House Coopers Audit & Assurance. 2003. First Time Adoption of International Financial Reporting Standards. Discussion Paper. Deloitte AASB, 2008, Business Combination”, Accounting Standards, Australian accounting Standard Board Brice, S. 2010. Strategic Decisions in the IFRS Conversion. Retrieved on February 26, 2012 from http://www.cpa2biz.com/Content/media/PRODUCER_CONTENT/Newsletters/Articles_2010/CPA/Feb/IFRSConversionProcess.jsp Conversion. 2007. The conversion of UK GAAP to IFRS: Volume One Scoping the effort. Deloitte IFRS. 2008. IFRS & UK GAAP: Similarities & Differences. Price Water House Coopers Transition. 2008. Managing the Transition to International Financial Reporting Standards. An Oracle White Paper. Oracle Read More