HI6025 Accounting Theory Assignment Sample
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Implications of International Accounting in Australia after IFRS Period
Executive summary
This reports analyses the implications of International Accounting for the post adoption phase of International Financial Reporting Standards (IFRS) from the perspective Australian companies. It poses implications for accounting/financial managers, regulators, capital market and its participants, analysts and investors. IFRS adoption has reduced the cost of financial reporting in companies simplified the reporting regulations, improved quality of accounting standards improved information comparability transparency of financial information. It is also put forward that surplus (loss) is compensated by the equity increase in Australian entities which leads to positive inference on the overall stakeholder wealth after IFRS adoption. However, the intangibles assets and liability impacts the financial position and performance reporting in the entities in the post IFRS adoption phase as a result of accounting policy changes in Australia. This proposes a change in role of accountants with better professional judgement to manage working in compliance with changes in accounting policy and practices after 2005.
Introduction
Since 2005, there has been a quick and fast paced adoption of international financial reporting standards (IFRS) in several countries. In particular, Australia has potential impact within IFRS adoption and implementation. These standards have been adopted by Australian Accounting Standards Board (AASB) for financial reporting (Bryce et al., 2015).. The Australian companies and government business enterprises prepare the financial statement for period on or after 1st January 2005 in accordance with IFRS. This has brought significant impact on the existing Australian standards, introduced new standards and altered the accounting procedure and financial reporting by Australian businesses. This has brought significant changes in the accounting policy. Thus, this report explores the implication of international accounting after the international financial reporting standards period in context of a developed nation, Australia.
Major implications of international accounting
The shift from Australian Accounting Standards (AAS) to IFRS has led to changes in the accounting policy. The IFRS is principle based approach in financial reporting which has changed the existing Australian standards for small to large local business to improve professional judgement of accountants to cope with market ambiguity, evaluate allocation of resources and provide solution to existing accounting issues in financial information reporting (Bryce et al., 2015).
In local government entities, there have been changes in performance indicators such as accounting surplus (loss), assets, liabilities and equity in the financial reporting in Australia as cited in the research of Ahmed and Alam (2012). These findings have implications for accounting managers, financial managers and practitioners, regulators, capital market participants and other stakeholders. From the research of Ahmed and Alam (2012) it can be viewed that this accounting standard adoption has reduced the cost of company financial reporting and financial analysis to a certain extent. It has simplified the reporting regulations, enhanced the comparability for performance metrics and increased the transparency of financial information. The adoption of reporting standards is crucial to gain admission to international capital markets, to enhancing communication with investors and improve the quality of accounting standards (Lourenço et al., 2015). The use of fair value measurement in these reporting standards has increased the quality relevance of financial statements for the stakeholders. It can be understood that adoption and implementation of IFRS has led to improved accounting quality. In this context, it is supported by the study of Chua et al. (2012) which highlight that the implementation of IFRS positively impact earning management, improved value significance of financial statement information and timely loss recognition which indicates better quality in accounting based metrics as compared to previously adopted Generally accepted accounting principles (GAAP) in Australia. Similarly, the research of Yurisandi and Puspitasari (2015) found that the quality of financial reporting improved after the IFRS adoption in areas of its understanding and relevance of performance indicators. The study of Ahmed and Alam (2012) is an indicative towards IFRS period to bring positive impact on information quality in enterprises when the disclosure is in accordance with the IFRS as compared to earlier Australian standards. The impact of information quality due to IFRS adoption/implementation is greater among companies with high capital dispersion, high surveillance and more listed shares for trade in Australia (Lourenço et al., 2015).
In particular, the inference of the international accounting after the IFRS adoption was linked to recognition of assets as well as liability for any deficits or surpluses in the research of Ahmed and Alam (2012). It would also require valuation of fixed assets based on fair value and not on current value. In addition, use of discounted cash flows will be requires which would involve the in the case of non-current assets in impairment testing.
The IFRS adoption effect on surplus (loss) is negative (due to selling of written assets and expenses) while effect is positive on equity. However, for local government entities the loss was compensated by the equity increase (by transfer of balance); this has positive inference on the overall stakeholder wealth in IFRS adoption in Australia (Ahmed and Alam, 2012).
The IFRS period will have implication on Australian accounting practices with regards to financial position and performance reporting to internal and external stakeholders’ for areas where no Australian standards exists towards recognition and measure of financial instruments. It is also viewed that IFRS period will have implication on intangible assets financial reporting. Under International Accounting Standards (IAS) 38, the intangible assets do not meet the criteria as assets (Deloitte, 2016). The write-off of intangibles assets thus, poses a significant implication towards the financial position of the Australian companies in IFRS phase.
On the other side, Ahmed and Alam (2012) mention the IFRS adoption inference with regards to liabilities. The author viewed that IFRS adoption has raised the total liabilities as an outcome of accounting policy changes while more firms have reduced equity and surpluses. It can be said that in the IFRS phase the average liabilities higher than as compared to period before 2005 during AASB. This increase is linked to the long and short terms provisions, short-term payables, and trade and employee benefits.
The IFRS adoption has implication on the capital markets to improve the operating conditions as it offers the companies to lower the capital costs while increasing potential to attract local and foreign investors. This can be linked to the change in financial information transparency and increasing the financial information/ statements comparability feature with global peers. In this regards, Hong et al. (2014) state that effect on capital market is more positive in companies with high difference in local standards and IFRS and on low quality of information which improved by IFRS adoption since 2005.
One of the implications of international accounting after IFRS period would be a growth in number of Australian business adopting IFRS. This would also propose change in role of accounting and finance professional in Australia in terms of their intellectual skills for principle based initiative, professional judgement, interpersonal skills and business management skills to cope with new accounting policy and practices. Another implication is concerned with the investors as the IFRS adoption by Australian companies is viewed to bring positive end result for the investing parties in relation to improvement in forecasting accuracy and dispersion by the financial analysts. This also indicates that international accounting pose implication for analysts after IFRS adoption with regards to their prediction ability and information comparability aspects. It can be said that this brings a positive influence on the financial analysts.
In relation to information comparability, it can be added that information becomes more comparable to the analyst in fulfilling reporting in accordance to IFRS as compared to earlier standards. However, there is negative implication in relation to information cost after IFRS adoption as it leads to rise in cost for companies towards audit fees (Surianti et al., 2017).
Topic alignment with academic unit:
The chosen topic is well aligned with the international accounting topics such as Accounting Standards, IFRS reporting and current issues in accounting standards from the course unit, HI6025. It is useful in in-depth understanding of accounting standards setting and motives for IFRS adoption in Australia. It is useful in determining the applicability of reporting standard in local entities especially government enterprises in Australia. It contributes to improve the knowledge and understanding of accounting metrics and relate to financial reporting issues in relation to Australian Accounting Standard Board (AASB) accounting standards and IFRS. Thus, this topic conceptualises and contributes in development of new knowledge in international accounting topics related to the academic unit.
Conclusion
To sum it up, it can be understood that implication of international accounting for IFRS adoption and subsequent implementation by enterprises is positive on accounts and accounting quality with regards to financial information and preparation of financial statements in Australia. The change in the accounting policy by principle based approach for financial reporting impacts the performance metrics accounting surplus (loss), assets, liabilities and equity along with information quality and cost. There have been value relevance, transparency and comparability improvements with regards IFRS adoption in financial reporting in Australian entities. It also poses implication for financial analysts, investors, capital market and its participants, manager and practitioners accounting field.
Reference
Ahmed, K. and Alam, M., 2012. The effect of IFRS adoption on the financial reports of local government entities. Australasian Accounting, Business and Finance Journal, 6(3), pp.109-120.
Bryce, M., Ali, M.J. and Mather, P.R., 2015. Accounting quality in the pre-/post-IFRS adoption periods and the impact on audit committee effectiveness—Evidence from Australia. Pacific-Basin Finance Journal, 35, pp.163-181.
Chua, Y.L., Cheong, C.S. and Gould, G., 2012. The impact of mandatory IFRS adoption on accounting quality: Evidence from Australia. Journal of International Accounting Research, 11(1), pp.119-146.
Deloitte. 2016. Research into the impact of IFRS adoption in Australia. [Online] Available at : https://www.iasplus.com/en/news/2016/03/aasb (Accessed: 10 May 2018).
Hong, H.A., Hung, M. and Lobo, G.J., 2014. The impact of mandatory IFRS adoption on IPOs in global capital markets. The Accounting Review, 89(4), pp.1365-1397.
Lourenço, I.M.E.C., Branco, M.E.M.D.A. and Castelo, D., 2015. Main consequences of IFRS adoption: analysis of existing literature and suggestions for further research. Revista Contabilidade & Finanças, 26(68), pp.126-139.
Surianti, M., Yadiati, W. and No, J.D.U., 2017. The Impact of IFRS Adoption, Quality of Accounting Information and Information Asymmetry on Cost of Equity (Analysis in Indonesia Stock Exchange as Emerging Market). International Business Management, 11(12), pp.2138-2150.
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