Implementation of International Financial Reporting Standards in Australia - Coursework Example

Section I: Article review - CIOs Called Clueless about Extra Costs In order to make a right pitch presentation for getting money sanctioned for a project, it is essential for the chief information officers (CIOs) to provide details of the project and especially include all the costs required to initiate the project. It has been often found that CIOs while presenting their pitches have failed to include the financial aspects of the project in detail, which results in under-sanctioning of budgets for the project. However, a study by McKinsey and Uptime states that corporate decisions regarding technological projects are not based on the cost of the project. Nonetheless, it cannot be denied that inclusion of true costs in a pitch would definitely help the company to estimate the actual cost of the project. The article under review presents one such example, wherein a company sanctioned a budget of $22 million for installing data servers as it considered the project to be a positive one. However, the company was totally unaware about the additional cost of $54 million that was needed to develop cooling and power capacities for running the servers. Also, another additional #32 million was required for operating the servers for the lifetime. Thus, the tech team overlooked the true cost of the project and failed to account for $86 million. Thus, it is required that the chief financial officers (CFOs) should intervene while sanctioning the budget for a project. Although, the CFOs intervention might solve various accounting issues related to budgeting, it might also create problems for the project. Just as the CIO is not aware of the accounting practices, the CFO would not understand the technical aspects. Thus, it might result in a clash between the two groups over the budget. The article analyzed provides many insights into the accounting practices, ethical issues and corporate politics within an organization. As the CIO is unable to provide the true costs of a project, it creates various issues within the organization the chief among them is that of budgeting. The accounts department works on a set budget and can sanction as much to the projects. Further, the budgeting is decided after taking into consideration various other factors such as profitability of the project, gestation period, impact of accounting regulations, taxation laws etc. However, if the technical team does not provide the true cost of the project, the accounts department would not be able to understand all the intricacies of the project and might sanction only as much as mentioned in the proposal. This may result in creating discords in the future, with the technical team demanding for additional money while the accounting team denying them on the basis of the original proposal. Any additional budget would also mean that the accounts team would have to re-orient their budgeting plan, which is a long-drawn process (Hollander et al 2000). Further, absence of true cost may also raise ethical issues in the company. As the technical team is unable to provide the entire cost for the project, it might lead to allegations by the stakeholders towards the company for misappropriation of funds and deliberate hiding of crucial information. The company often advertises its key technical projects in its annual reports and investor papers to attract investors. These promotional materials also contain the project size and cost. Many investors also decide on investing in the company based on such information. However, with the increase in project costing, the investors may feel cheated and consider the company as unethical (Hollander et al 2000). Such situations also create tensions within the organization and internal politics often result in such conditions. The CIO and CFO have different job profiles and may not be able to understand the work of each other. In such discord situation, the CIO and CFO may escalate the matter and try to put the blame on each other. The CFO may insist on asking for detailed project proposal from the CIO, who may be unaware of the various accounting practices. On the other hand, the CIO may provide technical details and give costing which the CFO may not understand and refute. Thus, the article reviewed exposed a very important issue of creating tandems between various departments while getting a project budget sanctioned. The company should provide training on accounting practices to all its divisions so that even the technical division is aware of the importance of accounting laws and regulations and take these in consideration while preparing a pitch presentation. Further, the accounting division should be actively involved in creating a pitch proposal and ask for detailed information about the project before sanctioning the budget. Section II: Implementation of International Financial Reporting Standards (IFRS) in Australia The Financial Reporting Council (FRC) in July 2002 provided its support to adopt International Financial Reporting Standards (IFRS) in Australia. IFRS helps in conducting financial reporting in a standardized manner and was adopted by January 1, 2005. Further, after the release of the Issues Paper No. 9 ‘Corporate Disclosure – Strengthening the Financial Reporting Framework’, the Federal Government also granted IFRS adoption by 2005. The implementation of IFRS in Australia was undertaken in three phases. The first phase was initiated in 2002 with the announcement by FRC to adopt IFRS in Australia. Thereafter, the Australian Accounting Standards Board (AASB) in 2004 drafted various accounting standards as per Australian character to be integrated in IFRS. The IFRS was finally implemented in the country in 2005-06. The harmonization process that AASB undertook during this period was very crucial and many significant changes were made in the accounting practices of the county to harmonize the standards as per the Australian market. The adoption of IFRS helped in bringing the accounting standards of Australia at par with the international standards. The accounting professionals were also rapidly assimilated with the new standards, which helped them in providing quality services and advices to their customers as per the global standards. AASB also worked towards harmonizing the Generally Accepted Accounting Principles (GAAP) and Governmental Finance Statistics (GFS) standards. It further focused on monitoring the efficacy of the auditors and protecting their independence in the country. The harmonization process undertaken by AASB also considered the three theories of regulation i.e. public interest theory, regulatory capture theory and private interest theory. With the implementation of IFRS, it is believed that the government acted for the ‘public interest’ as it provided an accounting standard as per the global regulations, which also helped in boosting public confidence in the companies. Further, such an implementation of standards would ensure that the government is able to regulate the companies to correct any malpractices or safeguard the company from market failure. This also helps in boosting the confidence of the stakeholders in a company. As the theory of public interest implies that the government has implemented certain regulation due to public demand and to correct market practices (Peltzman et al. 1989), the implementation of IFRS fulfills such a demand for creating standardized accounting practices. However, due to the intervention of the government and the abolition of previous accounting regulations in the country, the accounting professionals had to forgo some of their influence and power while conducting accounting services (Jubb and Houghton 2007). Regulatory capture theory on the other hand focuses on implementing regulation changes due to the demand from various interest groups (Posner 1974). In case of the implementation of IFRS in Australia, AASB was also under pressure from various corporate groups to establish the standard accounting practice as per the international regulations. With such an implementation, these companies were able to follow single accounting practice in most countries, especially in the developed ones. This also helped the companies to save on preparing accounting reports. However, such an implementation also exposed the AASB’s vulnerability to bow under the pressure of corporate bodies and groups and modify regulations for their benefits. Private interest theory proposes that the regulatory process is being dominated by private interests and not public interests. Some powerful groups such as political leaders and corporate bodies often initiate regulation changes for their own interests. The private interest theory may have limited influence over the implementation of IFRS. Although, most corporate bodies and even political leaders would have vested interest in implanting the accounting standards in Australia, it would have been difficult to influence AASB on a large scale as the decision to implement such a policy was a long drawn one and required many steps and regulations (Nicolaison 2005). The harmonization of IFRS also had many pros and cons, which are being discussed below: Pros: The implementation of IFRS helped in creating a single accounting standard that could be accepted in all the major capital markets in the world. This helped in facilitating investments across the border and also in reducing the capital cost. Further, the Australia-based companies were able to list themselves in overseas markets with the implementation of a standard accounting practice. Financial transactions are increasingly being conducted through various markets in the international arena and the Australian companies wanted to capture these markets and raise capital for their companies. Such a standard practice also enables experts to compare the financial statements of various organizations all over the world. This further helps in creating transparency for understanding the financial statement even for external investors (Jubb and Houghton 2007). Cons: While implementing the standards, the Treasury Department did not take suggestions from the accounting associations or experts, which might impact the effect of the proposal in the future (Jones et al., 2004). Although, most of the accounting associations had adopted IFRS there was initial oppositions for its implementation. These bodies argued that such a standard practice would reduce the independence of the accounting professionals and also lower the quality of accounting standards in Australia. Many also thought that Australia’s decision to implement IFRS at that stage was premature (Jones et al., 2004). Reference Hollander, A.S., Denna, E. L. and Cherrington, J. O. (2000). Accounting, information technology, and business solutions. Irwin/McGraw-Hill. Jones, S., Rahman, S. and Wolnizer, P.W. (2004). Accounting reform in Australia: contrasting cases of agenda building. Abacus 40, 379-403. Jubb, C., and K. Houghton (2007). The Australian Auditing and Assurance Standards Board After the Implementation of CLERP 9. Australian Accounting Review 17, 18-27. Nicolaison, D. T. (2005). A securities regulator looks at convergence. Northwestern Journal of International Business and Law 25, 661–686. Peltzman, S., M.E. Levine, and R.G. Noll (1989). The Economic Theory of Regulation After a Decade of Deregulation. Brookings Papers on Economic Activity, Washington, 1-59. Posner, R.A. (1974). Theories of economic regulation. The Bell Journal of Economics, 5(2), 335-358. Read More