Accounting essay help on: IASC Australia
Introduction
This essay has been designed to show how the decision of FRC’s has supported the IASC to make the Australia competitive in the International Capital markets, as there was a huge increase in the numerous Australian enterprises in the overseas market. To move towards IASC, Australia constantly change its standards with IASC standards so that the Australian enterprises would not face higher costs and the added benefit would be that Australian standards would get recognition in the Global markets, as a result Australia’s capital market would be in fine tune with major overseas markets and there would be two way movement of the funds. The adoption of IFRS in Australia would help the Australian entities to compare and analyze financial position with the other entities. At last, the adoption of IFRS is the best possible way because as the adoption of IFRS is expected to minimize the expenses which are probably to earn in the wake of difference in practices, countries will become more dependent on overseas funding. It has been viewed that in absence of international accounting standards, foreign entities would have to incur costs to prepare the financial reports in accordance with the host country.
Accounting of Australia
Financial Reporting Council (FRC) declared on 1st July 2002 that it would also adopt International Accounting Standards (IAS).
FRC’S DECISION TO SUPPORT IASC was to make Australia competitive in the international capital markets, as there was a tremendous rise in the number of Australian enterprises in the overseas market. As Australian accounting standards did not match with the major capital markets hence it led to rise in expenditure for the Australian counterparts. Another view as held by FRC was that the Australian standards were inefficient and confusing and were not being favored by stakeholders, which is explained by Cochran and Wood (2004). Effective financial reporting is only possible if the information used is based on consistent Accounting standards. The Australian accounting standards were too primitive in their approach; they did not reflect modern practices. As the accounting professionals set the standards, hence they lack the ability to present it to naïve users. There seemed a lot of confusion & overlap in Australian Accounting Standards Board and Public Sector Accounting Standards Board; hence it was imperative to adopt a common set of standards. The process of setting up standards was not able to fetch up the required financial support. In short the decision of FRC to support IASC was to promote investor confidence in Australian enterprises, keeping a check on the regulatory environment within which Australian enterprises operate domestically, put restrictions on the expansion of our enterprises overseas and enhance investment inflows in Australia.
Cultural impediments to the move towards International standards: The standards are yet to be adopted by all capital markets and even the leading capital markets are yet to adopt them for internal reporting requirements. There are still major differences in accounting policies across the world and there is no common set of accounting standards acceptable abroad which would act as an impediment to the adoption of IASC by other countries. The IASC standards were not of quality and were not even majorly accepted hence that acted as a roadblock for Australia to simply adopt them. The standards were also not very flexible as per the changing environmental conditions. The emerging economies will feel pressurized to conform to these standards and many of them may see it against their national belief. The standards provide various options in the framework of financial statements, which would again prove to be a hurdle.
As discussed above the FRC decided to adopt the IASC, hence there need to be made some CHANGES TO THE EXISTING AUSTRALIAN STANDARDS. To move towards IASC, Australia continued to align its standards with those of the IASC standards so that the Australian enterprises would not have to incur huge costs and the added benefit would be that Australian standards would get recognition in the International markets, as a result Australia’s capital market would be in fine tune with major overseas markets and there would be two way movement of the funds. For this FRC had to ensure that the AASC committed itself to the adoption of IASC and worked towards achieving it. FRC ordered AASC to simultaneously report the progress made from time-to-time. To successfully adopt the IASC, Australia needed to develop the conceptual framework needed for general purpose financial reporting; a Financial Reporting Act; use of accounting based on market value, and last but not the least, introduction of risk management techniques. For this changes were to be made in the Australian financial reporting practice and regulation. The conceptual framework as being developed keeping in mind the IASC was SAC 1 relates to the concept of the reporting entity; SAC 2 describes the objectives of financial reporting; SAC 3 puts forth the characteristics of financial information; and SAC 4 list the various elements of financial statements. The development of a generic Financial Reporting Act was to serve the purpose of accounting for both the public & private enterprises and there should be only one standard applicable to all. In compliance with the IASC, it was required to introduce a transparent policy based on present value and risk assessment as earlier historical cost accounting was the preferred one but it is certainly meaningless for assessing the financial standing or solvency of a firm. Market value accounting as adopted provided accurate picture of the enterprise helps in assessment of risk. Although principles of valuation were incorporated in Australian standards still the business community did not favor them. The development of risk accounting was primarily done to find out how changes to the items of balance sheet occur as a result of changes in the relevant environment.
As the International Financial Reporting Standards (IFRS) were being used globally the COMPANIES THAT WERE OBLIGATED TO PREPARE THEIR STATEMENTS IN ACCORDANCE WITH IFRS grew many folds. As all the economies were opened up, companies, shareholders, auditing firms & government realized the need for a set of common standards for the purposes of financial reporting. The entities required to do so were not only the ones, which were a part of global capital markets, but also the domestic ones. Australians formed a common set of standards, which were applicable to all the enterprises public as well as privates ones. GPFRs are required to be produced by those enterprises that do not have any users who can demand the preparation of reports, such entities are said to be ‘reporting entities’. If an entity is not a ‘reporting entity’ it will not be required to produce GPFRs and is also not bound to act in accordance with the accounting standard. The benefits mentioned in the AASB policy statement 4 are surely to materialize upon the convergence with IFRS as it would negate the problem of discrepancies in the standards followed by different nations and would also provide all the users with better quality information which would in turn lead to better decisions. It will also reduce financial analysis costs as the preparers of financial reports would not be required to prepare them a number of times to suit the requirements of the differing nations. The barriers to international capital flows would surely be eliminated as a common set of standards would be majorly understood and acceptable by all.
THE INTERNATIONAL STANDARDISATION OF FINANCIAL REPORTING ASSUMES THAT A SINGLE SET OF STANDARDS WILL BE APPROPRIATE ACROSS THE GLOBE. The assumption of the above perspective is definitely not appropriate. It would be like one dress fits all. That cannot be possible. Hence while doing the cost-benefit analysis of a standard it is imperative to find out the extent of its impact on the financial statements. For example, a particular standard would be only applicable for those companies which have a presence in the international arena, hence that could not be made mandatory for the domestic ones. Hence the above assumption cannot be held true in all cases and it negates the above assumption. The concern of having different accounting standards for different types of entities will definitely become a matter for immediate concern if Australia immediately complies with international accounting standards. This would be beneficial only to those firms which seek foreign capital or the ones that have a foreign presence but it certainly does not hold good for the entities which are purely domestic. Hence it is very clear that a single approach or a common set of standards will never work for all. Hence the preparation of standards should be done with a collective view of the preparers as well as the users whether professional or naive. In short, attention needs to be given to the domestic entities as well before any further steps are taken towards the compliance. It is not a rule of thumb which can be applied to any situation hence this matter needs due consideration before any decision is being made.
The adoption of IFRS seems enticing. But every coin has two sides. Hence we’ll discuss THE BENEFITS AND PITFALLS OF THE ADOPTION OF IFRS. Starting off with the benefits of adopting the IFRS. These would help to improve the quality of financial reports of Australian entities to match those of their global counterparts. It would also help to compare and analyze financial position of Australian entities with the other entities. This move will help to reduce expenditure incurred by Australian multinational companies and also foreign companies operating in Australia to prepare financial reports in accordance with the standards of the nation where they are operating. As a result, the barriers to international capital flows would surely be eliminated. Lastly it would also make it easier to compare the financial reports prepared in different countries and would enable the users of those information to make their decision based on the reports. Apart from the abovementioned there are also some advantages by the adoption of IFRS. The report prepared in compliance with IFRS would contain high quality information that would be relevant, complete, and reliable and could also be used for making comparisons as it will be prepared as per consistent policies. It is not necessary that one single set of standard will be adopted everywhere and it can be used by every entity. There is generally a time lag between all the countries adopting some set of policies. Hence that would work as a disadvantage. It cannot be like “one-size-fits-all” approach that we had already discussed above. The standards were also not very flexible as per the changing environmental conditions. The standards provide various options in the preparation of reports, which would again prove to be a hurdle. Another disadvantage of complying with the standards is that accounting practices differ from country to country which makes the comparison quite difficult. As there are still many differences in the practices adopted worldwide hence ant nation resorting to international standard are bound to face problems. In my view adoption of IFRS is the best possible way because as the adoption of IFRS is expected to reduce the expenses that are likely to incur in the wake of difference in practices, countries will become more dependent on overseas funding. In Absence of international accounting standards, foreign entities would have to incur costs to prepare the financial reports in accordance with the host country. If adoption of IFRS can certainly reduce costs then the emerging economies or the ones that need foreign funds would definitely take a step forward to it.In continuation of the discussion of the international standards above and as per the requirements of SAC1, I would like to inform the management committee that the Australian Future School Group (AFSG) is a reporting entity. So first of all it is necessary to outline the broad requirements of the SAC1, which require Australian Future School Group to be a reporting entity. As per SAC1 which defines and limits the scope of the word reporting entity as being used here. It also defines the general-purpose financial reports (GPFRs). These reports are required to be prepared for those users who require specific information and thus demand them from the enterprises in which they have some interest. These are the entities which are called the reporting entities. If there is an entity which is not a ‘reporting entity’ it will not be required to produce GPFRs and the entity is not at all required to comply with the accounting standards. A reporting entity is required to prepare its reports keeping in mind the following principles: understandability; relevance; reliability and comparability. If any one of these principles is left out then the report may prove to be meaningless to its users. Here the word “entity” refers to any firm (can be a partnership firm), company, body- corporate or even a person for that matter who have the necessary resources required to achieve objectives for which it has been established and “general purpose financial report” means a report which would provide all the information which would be complete, relevant and reliable and thus would help the users to base their decisions on it and would be comparable with the reports of other enterprises. General-purpose financial reports are prepared to provide users i.e. all the stakeholders with the accurate information about the enterprise. These reports serve as a means by which the enterprises discharge their obligations towards various interested parties like shareholders, prospective investors, customers, employees, government and many more. The factors that indicate a reporting entity are discussed under. There should be a separation of interest between ownership and management which means that owner group and the members of the management committee should not be the same. The greater is the difference between ownership & management the more likely it would be to prepare reports for the users through which they can analyze the firm and ultimately make better decisions. Economic or political influence refers to the impact which the firm is capable of exerting on its external environment and also the extent to which it is affected by its relevant environment. In case an enterprise has more control over the political and economic environment then in that case it has to prepare the general reports as desired by its users. Financial characteristics like the size, amount of revenues, assets etc of an entity are to be considered. In case of financial considerations there are some businesses which are not for profit hence in their case the size could be estimated by taking into account the resources provided to them by the government. Small concerns usually are not the reporting entities. This is because if any user is interested in the financial information then it can be demanded at the time of its use. The decision of declaring Australian Future School Group (AFSG) as a reporting entity is based on the factors that indicate the reporting entity. Firstly, it is very clear from the question that the management committee is separate from the ownership and thus has no economic interest in the entity (Lev, 2008). As & when a student gets enrolled in AFSG his/her parents become members of AFSG and are eligible to apply for election to the management committee. Hence it is quite clear there is no economic interest i.e. any expectation of monetary benefit is not there. As a result of greater difference between management and ownership it is likely that the users will demand the reports based on the general-purpose financial reporting system (Johnson, 2005). Secondly, the factor to be considered is political or economic influence. Whenever there is any institution or entity working within a nation, which was bound to get influenced by the various policies of its nation whether it’s an economic policy or any political consideration. Hence such entities are bound to move to the general-purpose financial reporting system. Thirdly, the factor to be considered is Financial Considerations, which will include the size of the entity, and as mentioned in the question the size is reflected in terms of the following parameters. No of customers: 1000 students (day boarding and full boarding), full-time and part-time childcare places for 500 families; No. Of employees: seventy-five permanent staff; Amount of sales: $9 500 000 and amount of assets: $2 500 000 as of 30th June 2011. One more reason which indicates that AFGS is a reporting entity is because of its size which cannot be taken as of a small concern. Hence it is quite clear with the above explanation that AFSG is a reporting entity. (Johnson, 2005).
Conclusion
The decision of the FRC’s to support IASC was to make Country Australia aggressive in the global capital market, as there was huge increase in the various enterprises of the Australia in the Global Market. The main benefit of the IFRS adoption is to improve the quality of financial reports of Australian entities to match those of their global counterparts. . A reporting entity is required to prepare its reports keeping in mind the following principles: understandability; relevance; reliability and comparability. Lastly, the adoption of IFRS would also make it easier to compare the financial reports prepared in different countries and would enable the users of those information to make their decision based on the reports.
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