Connection between AASB 1053 and the Arguments of Craig Deegan - Literature review Example

The AASB 1053 Name Institution Professor Course Due date The AASB 1053 Part 1 Connection between AASB 1053 and the Arguments of Craig Deegan Introduction: In Australia, the Accounting Standards Review Board was established back in 1984 to evaluate and approve accounting standards. This board was however replaced by Australian Accounting Standards Board (AASB) with the incorporation of the Corporations Law in 1991. This board has extensive mandate including the mandate to review standards, attract submissions from involved parties, instigate and develop standards and to approve standards (Deegan, 2009, p47). Since its formation the board has reviewed and approved numerous standards and example being the AASB 1053. This standard sets up a differential disclosure scaffold made up of two tiers of disclosure conditions for making general purpose financial reports. The Australian Tire 2 is different from tier 1 because of the need for recognition, measurements and presentation requirements of tier 1. Tier 1 generally outlines the general basis of reporting in Australian accounting standards. On the same note, tier 2 is different from international standards of the same perspective because of the need to ensure reduced disclosure requirements (AASB 1053, 2010. p47). This AASB standard has some connections with the arguments postulated by Craig Deegan in his work on financial accounting theory. The connection is based on the argument that “one doesn’t fit for all” as seen in both AASB 1053 and the work of Craig Deegan. This phrase means that at no one time will an accounting standard be satisfactorily applicable. According the argument of Deegan (2009, p50), changes or modification made to any standards of accounting or even introduction of new standards of accounting have an impact on reported financial numbers for instance profits or net assets. The AASB 1053 states that its introduction as standard of reporting will definitely affect the outcome of financial report; an example of one size that does not fit for all. Both the text and the AASB recommend that users should have adequate knowledge to be in a good position to evaluate the impacts that changed regulations will have on financial reports. For instance, Deegan makes reference to the statement made in the International Accounting Standards Board that users ought to have a sensible understanding of commerce and economic activities as well as accounting (Deegan, 2009, pp40-41). He continues to mention that the users should also demonstrate a readiness to learn the information with sound conscientiousness. The consequence of changes to standards is further broadened to the entire economy. Deegan (2009, p38) states that financial numbers find extensive use in the wider community hence changes in accounting standards are liable to result to considerable economic and social consequences. Under the basis for conclusion 10 in the AASB1053 (2010 p18), it is stated that prior to the approval of AASB 1053 there were some concerns associated with differential reporting framework. The first concern was that costs of making GPFS for some entities were above the benefits for these users since the structure lead to prerequisites for GPFSs that were excessively onerous for the vast majority of entities. The issue of cost of preparing financial statements based on some standards is also featured in the work of Deegan. According to Deegan (2009, p48), the requirements by some accounting standards in preparation of financial reports have always been very costly for many entities with less benefit. Many firms always try at all cost to adhere to the set standards of reporting but in the end do not benefit as much, this further shows how one size doesn’t fit for all. The second concern in the AASB 1053 basis for conclusion was that prior to the establishment of this standards, the needs of users were hardly being met resulting to dissatisfaction (2010, p20). This was because under the frame work, most entities that were supposed to do a GPFS report were treated as non-reporting entities which forced them to prepare special purpose financial statements. According to Deegan (2009, p62), accounting standards used by entities in their reporting should be that which directly relates to the needs of entities depending with their sizes and nature of business. He notes that most entities’ needs are rarely met by the standards they are required to follow when reporting their financial results. In the AASB 1053 (2010 P. 13), there is the subject of public accountability that has some connection with the argument postulated by Deegan. The basis for conclusion one in this standard indicates that the concept of public accountability is related to the concept approved by the IASB in its IFRS for Small and Midsized firms. Both this standard and the argument of Deegan concur that the idea of public accountability is dissimilar from the concept of public accountability in the broad-spectrum sense of the term that is frequently utilized in relation to nonprofit oriented entities as well as public sectors. The question of public accountability is argued by Deegan (2009, p45) in the perspective of whether accountants will be believed to be objective and free from partiality and to arrive at this judgment there will be need for particular theoretical assumptions to be developed. The principles of Australian Accounting standards and particularly those attributed by AASB 1053 imposes that regulations in form of standards ratification is imperative so that all and sundry can easily access the information they seek. Both the AASB 1053 standard and Deegan indicate that regulation is a way of ensuring safeguard of investors from falsified organizations who are characterized by production of disingenuous information. According to the works of Deegan (2009, p59), regulation is twofold; the private sector regulation and the public sectors regulation just as it is in AASB 1053. Under private sector regulation Deegan mentions that accounting profession is the perfect avenue to establish accounting standards due to their proficiency and their probability that the standards they set will be collectively agreed by businesses (2009, p60). AASB 1053 and other international standards always advise the users that the standards they set geared towards private sector are set in considerations of the inputs from professionals of various private sectors. Under the public sector regulation, Deegan continues to mention that government has more control over this. In this regard, the standards or regulations set appeal more to the public sectors and less to the private sectors and above all the regulations are set in the best interest of the public and not the private sectors (2009, p60). This is very much in line with the basis of conclusion in the AASB 1053 which implies that standards of regulation for public sectors are made based on the guidance of the Federal government of Australia and in the best interest of the Australian citizens. Deegan (2009, pp105-106) introduces the idea of international differences in accounting. This has some connections with the AASB 1053. Deegan makes reference to accounting headlines that even if vast majority of countries currently implement IFRS, if former accounting rules of these countries were to be applied to similar transactions significant differences would still be evident in profits and net assets. The AASB 1053 indicates that sections of IFRS have been amended in coming up with the standard to ensure that significant differences in net asset and profit reporting are minimized. Therefore, the argument by Deegan regarding differences in international accounting is shared by the Australian board in charge of standards; the reason why AASB 1053 was approved with the two tiers and tier 2 focusing on reduction in disclosure requirements to minimize the perceived differences. These accounting differences form the major arguments by a section of stakeholders to give explanation for the continuing efforts of the IASB to homogenize international accounting. The point of centrality depicted by Deegan here is whether there is need for standardizing accounting on an international front based of these differences. His caution here is the costs and benefits associated with the approval of this action (Deegan, 2009, p108). The AASB 1053 highlights the same opinion as was mentioned earlier that the cost of using the standards prior to 1053 were greater than the benefits associated with the standards. The issue of international standardization of accounting has been a long standing subject of debate among the professionals in accounting world; some are of the idea that international standardization is imperative while other argue that it is an infringement on the accounting cultures of many countries (Deegan, 2009, p109). Some countries would like to adhere to their own accounting standards because of cultural inclinations and the need to be free from bureaucratic requirements of international standards. This view is directly in harmony with those depicted by the AASB 1053. In this standard, it is mentioned that in the spirit of Australian culture, the standard was set to ensure that entities find it easy to report their financial results effectively and satisfactorily. All entities that are in some kind of operations whether profit centered or not have to report their results to a given stakeholders. According to Deegan (2009, p322), there are only two major kinds of stakeholders; those with more influence (power) and those with less or even none at all. Rarely will organizations treat all stakeholders equally; they tend to focus more on those stakeholders with power (Deegan, 2009, p322). Deegan argues that much as the reporting standards mention that all stakeholders of the organizations have a right to equal treatment, organizations pay less attention to this standard (2009, p323). The AASB 1053 on the other hand clarifies that an entity’s stakeholders ought to demand adequate response and treatment from their entities. However, according to Deegan, stakeholder influence is a utility of the stakeholder’s extent of influence regarding the resources needed by the entity (2009, p325). It is also worthwhile to note the issue of covenants in public and private debt issues. Deegan makes reference to the opinion of Mather and Peirson that more boundaries are placed on clandestinely negotiated debt contracts (Deegan, 2009, p292). He continues to mention that the fact that private debt agreements are more limiting as compared to public debt agreements can be clarified based on efficiency (Deegan, 2009, p292). That is, in the event that an organization violates its covenant, it gets into a technical evasion of debt indenture and as such it has the option of bargaining with the debt holders to reconsider repayment terms; that is, not geared towards immediate repayment of the debt. AASB 1053 gives guidance on matters debt that whether privately or publicly negotiated, all debts must be disclosed based on tier 2 and reduced disclosure requirements. The period of such reporting must be in tandem with the appropriate financial period. However, Deegan fails to mention how these debt contracts should be accounted for in the financial reports. Part Two: Pending Issues in Tier 2/RDR and the Argument of Craig Deegan Topic: Amendments to AASB 7 ED 207: Tier 2 (December 2010): This topic gives the genesis for the approval of AASB 1053 and aspects of tier 2/RDR. Amendments to AASB 7 originate from the reworked or amended AASB 9 and AASB 2010-7 ED 207, p. 3). These two standards apply obligatorily to annual periods commencing on or after 1 January 2013. It also relates to amendments to AASB 7 originating from AASB 2010-6 which is about supplementary disclosures regarding transfers of financial assets. This standard applies obligatorily to annual periods commencing on or after 1 July 2011. In regards to financial statement, the amendment to AASB 7 requires entities to reveal by class of financial mechanism by categorizing financial instruments into categories that are suitable to the kind of the information revealed and that consider the distinctiveness of those financial instruments ED 207, 7). In this regard, entities are required to provide adequate information to allow reconciliation to the line objects revealed in the statement of financial position. The amendment also requires an entity to disclose information that permits users of its financial statements to estimate the implication of financial instruments for its financial state and performance. The first debate arising from these suggested amendments is whether there would be common agreement particularly with tier 2 aspects. The second debate is whether there would be any regulatory issues that have the probability of impacting upon the discharging of the implementation. The third debate arising is whether the proposed amendments would lead to the objective of having financial statements that are of use to users. The fourth question is whether the proposed improvements take into consideration the Australian economy and lastly is the issue of cost and benefits of the proposed improvements subject to the existing requirements (ED 207, p. 4). This pending issue of amendments to AASB 7 under ED 207 has some connections to the arguments of Craig Deegan in his work on Financial Accounting Theory. In the most logical sense, any expert or professional in the accounting field as well as stakeholders in matters of financial reporting would be very much interested in the overall impacts of improvements to reporting standards. In relation to the debate about impacts of proposals to no-profit and public sector entities, Deegan appears to indicate that unitary standards of reporting should not be applied to all firms. According to him, there should be some exemptions in consideration of the nature of some firms; profit oriented, non-profit oriented, public firms and small firms (Deegan, 2009, p 47). Based on international boards in charge of financial reporting standards, unitary standards of accounting have serious consequences. The usefulness of a proposal or an idea to the user is as important as the idea itself. If the idea is not useful to the user, then it is as good as nothing. According to Deegan (2009, p61), many proposals on accounting standards keep cropping up because of number factors. One is because of the need to streamline systems and two because of the changing business environment among many others. However, Deegan notes that these proposed improvements should at least be in the best interest of the entities that are expected to apply them; that is, their application should be of utmost use to them and not the routes to dilemmas (2009.p38). Under the topic of culture and economy, Deegan’s idea is somewhat linked with the debate of whether the proposed amendments to AASB 7 are in the best interest of the Australian economy. He brings out the correlation of accounting standards with economy by arguing that some standards of accounting may not lead to a true reflection of the overall performance of the economy (Deegan, 2009, p39 and p323). Last but not least, Deegan has mentioned not once but in many instances that the cost and benefits of a standard of financial reporting is an important factor to consider. Some standards could be less burdensome in terms of requirements but very costly while other could be the opposite. His argument concurs with the last debate that touches on the cost and benefits of the proposed improvements. Conclusion: As off merging customary standards of reporting with international standards such as IFRS or IASB, Deegan mentions that this is an important route especially when considering some limitations of local standards especially to entities with international stature (2009, p38). Conversely, he notes a balance should be struck so that the systems of accounting and reporting are not completely lost (Deegan, 2009, p109). Overall arguments by Deegan and the AASB 1053 standards exemplifies how not all accounting or financial reporting needs are met a standard or a set of standards. References AASB 1053 2010 retrieved from: http://www.aasb.gov.au/admin/file/content105/c9/AASB1053_06-10.pdf Craig, Deegan 2009, Financial Accounting Theory, McGraw-Hill: Sydney Read More