Australian Domestic Accounting Standards - Coursework Example

Brown and Tarca (2012) observe that adoption of IFRS meant that all Australian listed companies were required to follow IFRS when preparing and presenting their financial reports. This move was a welcome gesture since it would increase the reliability and transparency of the various company accounts and enhance comparison of different companies. Before the introduction of IFRS, Australian Domestic Accounting Standards required that capitalized purchased goodwill be amortized. There were, however, no regulations for the treatment of acquired assets. When IFRS was introduced in Australia in 2005 there were some changes to this. The changes include the demand, by these new standards, to have a reversal of accounting treatment of goodwill reversed from what was being done under Australian accounting standards. The reversal is seen in the requirement that intangible assets be amortized, and have a defined life. On the other hand, IFRS is required to have an annual impairment test. The changes in reporting requirement as outlined in IFRS have had effects on company balance sheets of companies as compared to when the Australian accounting standards were in use (Wines and Ferguson, 1993). Concerning recognition of goodwill as a result of acquisition of new assets, IFRS give companies some latitude regarding the value of the goodwill that is being capitalized. Since goodwill is the difference between value of the firm that has been purchased and its identifiable assets, the amount of goodwill is dependent on the management’s ability of identifying intangible assets. As a result of this requirement, it is in the best interest of companies that have a higher risk for violation of a debt agreement to acquire firms that will increase their goodwill (Markarian et al., 2008). These requirements by IFRS and the response to them by companies show that there is a positive relationship between leverage and the amount of goodwill capitalized. New and emerging issues should be quickly solved by reference to an existing framework of basic theory. Over the years, several organizations, committees and individuals have developed and published their own conceptual framework of accounting, but no single framework has been universally accepted and relied on in practice. Conceptual framework for financial reporting is based on its objectives, qualitative characteristics and the concept of recognition and measurement. The original accounting standards and IFRS differ in the way they recognize and measure intangible assets among other things. Recognition and measurement concept explains how, when and which financial elements and transactions should be measured, recognized and reported by the system of accounting. Companies should prepare their financial statements in an acceptable manner so that they can be compared with the previous year’s statement and with the statements of other enterprises. There are various cost measurement models used in accounting. Reporting of financial statement elements employ these models in different degrees and in varying combinations depending on the accounting policy that is adopted. These models include historical cost, current cost, realizable value and present value. Under the historical cost concept, assets are initially recorded in their account at cost and no adjustment is made to this valuation in later period except to allocate a portion of the original cost to expense as the asset expires. At the time an asset is originally acquired, cost represents the fair market value of the goods or services exchange as evidenced by an arm’s length transaction. With the passage of time, however, the fair market value of such an asset as buildings may deviate greatly from the historical cost. Liabilities are recorded at the amount of proceeds received in exchange of obligation, or in some cases, at the amount of cash or cash equivalents anticipated to be paid to satisfy the liability in the ordinary course of business. According to AASB (2004), stating the financial statements core objectives would be simple if all users had similar needs and interests. Accounting information should be free of bias intended to achieve a predetermined result or to provoke a certain mode of behaviour. Freedom from bias is essential as it improves the quality of decisions by decision makers. Accounting information should show an agreement between a measure and real world phenomenon that the measure is supposed to represent. The truth of accounting information should be verifiable by examination of evidence of underlying facts. However, differences in the operating policies among different enterprises results in the adoption of various accounting practices. Whatever practice adopted the company has to maintain consistency in its application in order to allow comparison between different accounting periods. Information that has been measured and reported similarly is considered comparable and that is why Australian government made it compulsory for all reporting entities to adopt IFRS. The disclosure principle requires that financial statements be complete in the sense of improving all information necessary to users of the statements. CCH Editors (2008) argues that if the omission of certain information would cause the financial statements to be misleading, disclosure of such information is essential. Example of information often disclosed in notes to financial statement include: a summary of significant accounting policy; related party transaction; description of stock option and pension plan, and amount and nature of contingencies and commitments and terms and status of proposed business combination. Information is considered material if it has an effect on the decision made by a user. Disclosure is necessary in financial statements if it can have an impact on decision made. In deciding on the materiality of an item in terms of financial statement disclosure, accountants should consider whether knowledge of the item would likely to influence the decision of users of financial statements since that which is material for one entity may not be material for another entity. According to Akman (2011), financial disclosure has been found to increase after the adoption of IFRS. However, this does not eliminate the impact of culture on disclosure of financial information.  As such, disclosure of financial information though improved, still remains subject to the company’s cultural background. Zeff (2012) clarifies that a departure from one accounting policy to another needs an accounting treatment to reconcile the financial statements of the company. The IFRS requires a company to make a comparison of the financial statements with the previous year’s statements. This proves difficult in such a transition period since the previous year’s financial statements were prepared based on Australian Accounting Standards. This means that the 2004 financial figures have to be restated to Australian versions of international accounting standards so that the financial statements of the two years can be compared. However, if there is a requirement for a company departing the original accounting standards to produce a comparative data for years 2003 and 2004, there is no requirement for the company to reinstate the 2003 financial data to IFRS. This paper is concerned with assessing the changes in recognition and disclosure requirements for intangible assets, including goodwill and research and development as brought about by the change in accounting policy. A difference of the original and the adopted accounting standard is significant especially when there is business combination and in the process the company has acquired intangible assets. The original accounting standard left the decision of recognizing the acquired intangible assets at the discretion of the management of the companies. As a result majority of companies did not recognize the acquired intangible assets as separate assets distinct from goodwill. Under the adopted IFRS companies that acquire intangible assets as part of a business combination will be required to make recognition of the acquired intangible assets. There are many tests that can be carried out to establish if intangible assets that are internally generated from the business should be recognized and shown in the balance sheet of the company. It is a requirement to make an estimation of the useful lives for all the intangible assets that have been recognized in order to make an amortization of the asset over its useful life. Certain intangible assets have indefinite lives hence amortization is not required for such assets. The accounting treatment that was originally accorded to goodwill change since IFRS does not allow amortization of goodwill. Therefore, it will be necessary to carry out an impairment review of goodwill to ensure that the carrying values of intangible assets are not overstated especially for those intangible assets that are allocated indefinite lives. Unlike AASB, IFRS have many circumstances for recognizing and capitalizing internally generated intangible assets. Therefore, the adoption of IFRS will impact heavily on companies with significant expenditure on research and development since they will have to be recognized and capitalized hence the balance sheet position of the company will change. IFRS requires that where an intangible asset is acquired through business combination it should be recognized as a separate asset from goodwill if they are identifiable and a reliable measurement of their cost can be placed. References AASB (Australian Accounting Standards Board), (2004). Framework for the Preparation and Presentation of Financial Statements. Melbourne: Australian Accounting Standards Board. Akman, N. (July 2011). The effects of IFRS adoption on financial disclosure: does culture still play a role? American international journal of contemporary research, vol1, No 1.  Brown, P. and Tarca, A. (2012). Ten years of IFRS: Practitioners’ comments and suggestions for research. Australian accounting review, 63(22): 319 - 330. Markarian, G., Pozza, L. and Prencipe, A. (2008). Capitalization of R&D costs and earnings management: Evidence from Italian listed companies. The International Journal of Accounting 43(3):246-267. McGregor, W., (2012). Personal reflection on ten years at the IASB. Australian accounting review, 22(3):.225-238. Wines, G. and Ferguson, C. (1993). An empirical investigation of accounting methods for goodwill and identifiable intangible assets: 1985 to 1989. Abacus 29(1): 90-105. Zeff, S. A. (2012). IFRS Development in the USA and EU, and some implications for Australia. Australian accounting review, 47(18): 275 - 282. Read More