QUESTION
ACC29083: THEORY OF ACCOUNTING
Assessment details for ALL students
Assessment item 1 — Individual Case Study
Due date:
Tuesday of Week 7
ASSESSMENT
Weighting:
Length:
Objectives
30%
2500 – 3000 words
The objectives of your assignment are:
To develop your critical analytical skills and written communication to a point that you have
demonstrated you can communicate and argue a case from an accounting theory perspective.
This assignment requires a substantial search of the accounting theory literature and contemporary
developments on global accounting regulation. You will need to use the resources of the various
databases and your text to successfully undertake this work. Extensive reading is highly desirable.
Case Study
International View 2.1 on pages 26-27 in Chapter 2 of your Textbook: Godfrey,
Hodgson, Tarca, Hamilton and Holmes, 7
th
edition, 2010.
Case Title: “IFRS is a Big Four gravy train.” – By Richard Murphy
Required:
The case is about the global controversy around the adoption and application of International
Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board
(IASB). The specific debate in this case is about forcing the UK local authorities to adopt IFRSs for
their financial reporting. Australia has been one of the early adopters of IFRS. This case may have
major implications and ramifications for local authorities in Australia. Read the above case, examine
the arguments and counter-arguments, and research other relevant materials to answer the following
questions in your own words:
1. Murphy argues that “UK GAAP was accruals accounting and sought to match transactions in a
period to provide a measure of what had happened in that time scale. Balance sheets are a residual
measure in that process. So, this GAAP was about stewardship, financial performance, delivery of
value for money, and action over time. IFRS on the other hand is about measuring value at a point
of time and comparing that with values at another point in time. The difference is the result for the
period. So the balance sheet is predominant and the profit and loss account secondary . . .”
1
– If Murphy is correct, then the introduction of IFRS implies a major paradigm shift in
accounting. Critically examine the nature of IFRSs through your own research and comment
on Murphy‟s statement. Is Murphy correct in his claims?
2. Murphy suggests: “IFRS will not require accounting for stewardship of public funds entrusted, or
for the supply of services, both of which are core to the management of local authorities. And we
know that a failure to measure almost always means a failure to deliver in management terms. This
means we have a potential disaster on our hands.”
– Do you agree with Murphy‟s view? Why, or why not? Justify your answer with suitable
explanations.
3. Stewardship, financial performance, delivery of value for money and action over time – all seem to
be quite relevant and desired accounting attributes for local authorities. If IFRSs are “wholly
uninterested” in these attributes, then why are IFRSs being imposed on UK local authorities? Who
are the major beneficiaries of this move? How are they likely to be benefitted?
4. Murphy claims that the IASB does not act in the public interest. They are a private cartel designed
and promoted for the benefit of their biggest sponsors – who are the Big 4 firms of accountants.
– Critically examine the validity of the above statement. What are the implications for accounting
in different countries if the above allegation is true?
5. Do you think IFRSs should be adopted by Australian local authorities? Why, or why not?
Important points:
You are required to demonstrate scholarly discussion, critical analytical skill, courage to take a
stand, and express your position on the issues. You should be able to understand the questions and
answer them with precision.
You may use the CQU library for the case study.
Academic as well as professional journal articles may be relevant for the case studies. Academic
journal articles are generally approximately 4500 words in length and always include references.
You may use your text to provide additional information not covered in your articles which you
believe is important. However, most of your material should come from other sources.
The best databases for finding relevant articles are: EBSCOHOST, Infotrac and Emerald.
The assignment should be prepared in a case analysis format. Answer the specific questions. Do
NOT write an essay. This is an individual case study. You are free to discuss the case with your
fellow students. But your answers and writing style must be different from those of others. Do not
share your submission with others. Otherwise you may be accused of plagiarism.
You may also wish to seek assistance from the Communications Learning Centre or Learning
Skills Unit for additional assistance on how to research and write your assignment.
Regular access to the course website is a requirement of this course. Additional information
regarding this course may be placed on the course website. This information may include, but
is not limited to, assignment guidance and exam preparation.
Referencing
You must use both in-text referencing (e.g., author surname, year of publication, page no. if
applicable) throughout this assignment and a reference list at the end of the paper. Refer to the
Guide for students for referencing style.
The assignment should be prepared using 12 point font and 1.5 line spacing.
Assessment criteria
Assessment of the case study will be based on the criteria listed below and your submission should
include the following:
A title page with the title of the case and your details.
A brief abstract or summary (maximum 200 words).
Preamble/introduction – how you see the case and how you have approached the case study.
Branching out to existing literature – other resources you have used to analyse the issues in the
case and collect empirical evidence in support of your answers/views. References to be provided in
the text and a reference list included at the end.
Identifying, analysing and arguing the core issues. Discuss all aspects.
Answering the case Questions. Be precise and answer to the point. Show evidence of good
critical thinking and research.
Logical arguments to establish your views.
Discussion on other peripheral issues.
Use of suitable examples in support of arguments.
Conclusion. A closing statement. What you have learnt from doing the case study.
Detailed Marking Guidelines
Assessment Criterion Requirements Marks
Question 1: Do IFRS represent a
different accounting theory
(paradigm) than that under a UK
GAAP? In what way does it shift
the emphasis of traditional
accounting from income
statement to balance sheet?
Question 2: What are the
normative requirements for a
good accounting system in local
authorities? Stewardship,
delivery of value for money,
accountability and forward
planning are some suggested
attributes. How does IFRS fail to
deliver those attributes?
Question 3: Why IFRSs are
imposed on local authorities
given the argument that they fail
to serve the purpose. Who, or
what forces are behind this push.
Question 4: The author suggests
that the IASB and the Big 4
accounting firms are in a cartel
behind the emergence of the
international financial accounting
standards. Is this so? If so, what
are the implications?
Question 5: Given the above
debate, do you think IFRSs
should be adopted in local
authorities in Australia?
Critically examine the traditional accounting GAAP
with the income statement as the focus of all
attention and balance sheet as a „garbage can‟ to
capture the residual values. Contrast with IFRSs‟
emphasis on valuation and income measurement.
Using valuation for measuring income and not vice
versa. Does it look like a major paradigm shift in
accounting?
Briefly discuss the nature of local authorities, their
goals, activities, key success factors, performance
indicators, non-profit objectives and match with the
accounting system required to achieve those
objectives. Examine why and how IFRS
fails/succeeds to help them in achieving those
objectives.
Explore the political realities surrounding the
formation of the IASB, promulgation of international
accounting standards on various countries and on to
local authorities. This question requires students to
go behind the scene and identify the vested interest
groups and their benefits if local authorities are
forced to adopt IFRSs.
This question requires students to logically and
empirically examine why IASB and the Big 4 should
be in some kind of alliance? Where is the common
mutual interest? What other authors say about this
issue? Do anecdotal/empirical evidences indicate
such a cartel? If so, what does it mean for all the
countries/ authorities who are led to believe that
IFRSs are in public interest?
This question requires the students to demonstrate
their synthesising skill. Examine the pros and cons of
adopting IFRs and then pass on your judgment in a
logical manner.
Good written presentation
A cover page, an abstract, a good preamble to the
case and a logical flow of reasoning
Evidence of good research correct
and
complete
referencing
On each question the students are to branch out to
available articles on the relevant issues and use their
findings/opinions to support answers/opinions.
Total
30
8
6
5
5
3
2
1
Assignment submission
This assignment should be submitted in printed form with a signed Assignment
Coversheet AND online via ‘Moodle’.
On and Off Campus students should access CQUcentral to print a personalised assessment
coversheet for each assignment submission. Instructions for generating your coversheet are at:
http://dtls.cqu.edu.au/FCWViewer/getFile.do?id=23407.
All off-campus distance learning students should submit hard copy, signed assignments to the
Student Contact Centre, Building 5, CQUniversity, Rockhampton, QLD 4702. An online submission
is of the assignment is also required.
All on-campus students should submit a printed and signed copy of the assignment with personalised
coversheet to assignment drop-off boxes located on your particular campus – or submit to the
Administration Office if no box is available. An online submission of the assignment is also required.
All Australian International Campus (AIC) students should access the personalised coversheet
available at your Campus.
STUDENTS PLEASE NOTE:
Any material transcribed directly or paraphrased/sourced from the set textbook, other texts, journals,
on-line material or a colleague‟s assignment, and not properly referenced, will incur a penalty.
Material in the assignment that bears a strong resemblance to another source and not correctly
referenced will also be penalised.
The Faculty Plagiarism Policy may be accessed at:
http://policy.cqu.edu.au/Policy/policy.jsp?policyid=198
SOLUTION
1. Introduction
The paper studies the case of the introduction of the IFRS by the International Accounting Standards Board (IASB). The paper studies the specific case of the adoption of the IFRS by the local government authorities.
The paper critically examines the effect of the decision of the International Accounting Standards Board (IASB) and its effect on the financial reporting system of the local government bodies. The paper analyses and critically examines Murphy’s views points and basis the study on the fact and journal papers analysing the specific case. Let us take in to consideration specification questions posed by Murphy and undertake a critical analysis.
2. Replacement of the ‘UK GAAP’ with IFRS
The UK accounting board has proposed the replacement of the UK GAAP system with the IFRS. This is a new 3 tier approach which is likely to have an impact on the company’ s and SME’s to switch the new system of financial reporting. The transition to the IFRS may be more significant for certain public sector bodies than the private companies. The IFRS represents a certain structural shift in the financial reporting system. The public sector bodies would have to adopt a new system of financial reporting is line with the new system in place. The new system ensures greater degree of financial disclosures by taking some of the contracts to the back date. The system requires a significant change in the reporting of the consolidated financial statements.
The main difference between the UK GAAP system and the IFRS is that the IFRS is that the IFRS requires accounting for investments in the separate financial statements. In the organizations accounts the investments need to account in separate accounts and at cost value. This was however not the case in the UK GAAP system the new system is likely to make the financial disclosures more trust worthy since they would be accounted at cost value. This would enable the local government’s authorities to correctly account for their costs and investment.
(Ernst and Young, Spring Summer Report, 2011)
Taxation is a key consideration that has been significantly changed in the IFRS system in comparison to the UK GAAP system. The change in the GAAP system has caused the changes in the timings and the amount of cash tax payable in the periods to come For example in the case of goodwill accounted for 10 years in the past for an organization A would now be subject to greater tax deductions at the current rate thus, accelerating the tax deductions rate compared to the UK GAAP system. Compliance requirements would tend to add an additional burden on the corporations compared to the UK GAAP system (Deloite.com – accessed on 13/4/2012).
Despite the differences in the financial reporting system the introduction of the IFRS system is bound to introduce a greater degree of accountability and responsibility in the financial reporting. Murphy’s view is somewhat extreme in saying that the consolidated balance sheet would become redundant, but however the system would introduce real values in the balance sheets. It would also enable the identification of key issues and problems of the departments and enable management to take appropriate decisions speedily.
3. Financial Stewardship Requirement Shift
The UK accounting board has proposed the replacement of the UK GAAP system with the IFRS. This is a new 3 tier approach which is likely to have an impact on the company’ s and SME’s to switch the new system of financial reporting. The transition to the IFRS may be more significant for certain public sector bodies than the private companies. The most important issues for public sector bodies include the accounting for PFI schemes and similar arrangements, the treatment of derivatives embedded within other contracts and lease accounting. According, to Murphy the key issues that have identified as the bone of contention particularly for the public sector bodies is the reduced authority and the residual nature the balance sheets to have because of the changes proposed under the IFRS.
(Wayment , 2009)
The IFRS proposes that the PFI schemes undertaken by a large number of public sector units be disclosed on the balance sheets. To adopt the practice the government bodies will have to consider their previous take up the original treatment and go back to the original treatment. This would result in the items to be reported on “on the balance sheet” i.e. they would have to go back to the original dates which would pose to a tedious and a long procedure to be undertaken by the public sector authorities. The same issue implies in the case of lease contracts undertaken by the public sector authority’s i.e. they would need to go back to the original date.
This however is a contrasting view to Murphy’s who believes that the introduction of such methods would lead to the back dating of the financial statements making them redundant in the current period. On the other hand the aim of the change proposed is to introduce greater number of financial disclosures in the balance sheet. This would enable in ensuring greater accountability particularly for the public sector authorities. Moreover with greater financial disclosures the problems associated with the authorities can be easily identified and steps to practically solve the problem can be introduced in a speedy manner. The introduction of the IFRS is likely to ensure stricter rules and regulations particularly for the staff of the authorities. Stricter personnel rules would ensure greater responsibility undertaken by the public sector employees. This is a challenge for most government departments as they have complex accrual systems and personnel leave systems. This can be explained with the help on an example: The MoD has arrangements for serving personnel. The movement in accrued leave owing to operational requirements may fluctuate significantly yearly, but for other departments the yearly movement may be insignificant (Wayment,2009).
Murphy’s view point is somewhat cynical that the public sector units would be back dated with the financial statements becoming redundant. On the other it ensures greater accountability and would also introduce more responsibility in the financial reporting system. It would not be incorrect to say that it would result in the paradigm shift in the financial reporting. The main problems that can be identified with the process are adoption of the changes by the accountants and the managers of the authorities. A specific understanding of the procedure is required to ensure the correct financial reporting. The system has been introduced to ensure a greater level of accountability and responsibility in the financial reporting system. The issue of stewardship wold also is resolved as a high number of financial disclosures would ensure better allocation of resources moreover provide a better understanding of resource allocation. The New system though a tedious technical process is likely to introduce efficiency in the financial reporting system.
4. Beneficiaries of the Change of System
The UK Accounting Standards Board‘s proposal to replace the existing system with a three tier approach. Companies will face major decisions as to which reporting to switch to the new compliance norm. Firstly it proposes use of full IFRS for publicly accountable entities Secondly; it proposes the use of the “IFRS for SMEs” standard for most UK companies without public accountability. Thirdly; it proposes the continuous use of the FRSSE for those companies that qualify. Thus from the above proposals it can be said that the main beneficiaries of the new accounting system introduced are the company’s and the SME. It enables the companies to project higher values in their financial statements reporting. For Example in the case of Goodwill accounting the value is calculated on the basis of past data this ensures a higher value projection in the balance sheets.
The public sector units and authorities are non-profit making enterprises and not concerned with higher valuation of investment or goodwill. Public sector authorities are concerned with maximising of the social benefits and not maximizations of profits. It can however be said that some the issues like investments accounting, projection of high goodwill or asset valuation may not be applicable to the local authorities and the public sector units. Thus the IFRS system introduction may not be 100% required for the public sector authorities. It can also not be denied that the IFRS system does ensure more accountability particularly in the case of employee accruals, which is an extremely important entity in the public sector. Ensuring efficiency of employees is the key element of the success of the local authorities. The public sector finance management includes the mobilization of financial resources as well as the prioritization of key public sector projects and the resource allocation based on maximization of social benefits.
IFRS ensures the creation of certain standards with respect to financial reporting and particularly the accounting and management of financial resources. However certain issues in the IFRS may not be applicable to the public authorities but effective resource allocation is extremely important and the IFRS system does impose the regulation for effective resource allocation and greater financial stewardship.
Though the public sector authorities may not be the direct beneficiaries of the IFRS but it cannot be said that the financial reporting system is completely redundant for them. It is certainly applicable to a great extent on the public sector authorities. Though the local authorities would have plan and ensure compliance with the new rules and regulations, this however is a tedious process for the public authorities as they account various departments across the length and breadth of a particular country.
(Epstien, 2009 and Deloite.com – accessed on 13/4/2012)
Since the adoption of the IFRS is a time consuming task, the public sector firms have been given more time to adapt to the new system of financial reporting. Even if a public sector firm does not have a requirement for much change it has to change as per the requirements of the each specific case specified in the new system. Various sources of information need to be consolidated before the adoption of the new system, therefore time undertaken to adopt the system should not be underestimated. A large number of public corporations with the adoption of the external advisors have now been able to comply with the change. Since the IFRS standards are more applicable to the private sector they have been produced and implemented simultaneously. On the other hand the public has to wait for a long time before it could actually adopt the system given the public sector’s complex budgetary framework the implications need to be considered. The connection between the impact of IFRS accounting changes, the budgetary framework in the public sector, and IFRS’ requirement to capture relevant disclosure from outside finance will imply government finance professionals must move out and be more evident across departments.
(Accountancy Age.com – accessed on 13/4/2012)
5. IASB and Public Interest?
Murphy claims that the IASB does not act in the public interest and they are a private cartel designed and promoted for the benefit of their biggest sponsors. This statement is however not true because the IASB was formulated to ensure accounting standards and disclosures that certainly in investor and public interest. IFRS has been formulated by IASB to ensure stricter controls and regulations and control such that the firms and organizations are unable to mislead their stake holders. The IFRS system ensures a greater degree of responsibility introduced in the financial reporting and the disclosure system.
The Commission services working paper on governance developments in the IASB (International Accounting Standards Board) and IASCF (International Accounting Standards Committee Foundation) meeting on 11th July highlights the public commitment of the IASB. At the end of the meeting the authorities ensured the to strengthen governance structure such that the body can concentrate on the public interest issues as well as financial stability issues. The IASB has fully consulted all the stakeholders including investors and organizations before introducing the IFRS system. The IASB has analysed the impact and certain issues before introducing as a global compliance measure. An appropriate testing field has been developed before introducing and adopting the system. To ensure the adequate representation of the stakeholders the board has formulated International Accounting Standards Committee Foundation (IASCF), IASB and International Financial Reporting Interpretations Committee (IFRIC) governing bodies. These bodies ensure adequate stakeholder representation in the board. The IASB has ensured strict regulations particularly with the stakeholders to strengthen the consolation process and the board demands answers in writing for not considering the views of the stakeholders. The credibility standards are further enhanced by this assessment process.
Thus Murphy’s claim of an existence of cartel is somewhat incorrect because the board has undertaken certain efforts to represent all the stakeholders equally as well as ensure the protection of stakeholder interest. The big four firms PricewaterhouseCoopers, Deloitte Touche Tohmatsu, Ernst & Young, and KPMG do have certain representation in the IASB but it should not be forgotten that the rules have been laid for corporate compliance ensuring greater financial disclosures. The firms may exercise some control and make suggestions but a cartel system is non-existent as these firms are major competitors of each other globally.
(ec.europa.eu – accessed on 12/04/2012)
Adoption of the system by different countries varies on their regulatory authorities. In the countries where the regulator is stricter the companies would be less willing to depart from the strict construction of the IFRS systems because the regulator can raise certain objections to disclosures in the financial reporting system. The strength of the regulator is important to ensure worldwide compliance of the IFRS (Zeff, 2007).
5. Adoption of the IFRS by Australia
Empirical studies and real world applications have proven that the IFRS system ensures a greater degree financial transparency in the system. It has been found that the adopters of the system have experienced effects on the cost of capital and the liquidity and the label adopters. It has also been proven that the quality of financial disclosures has improved after the introduction of the IFRS system. This has been proven statistically as well have been researched by the analysts. The IFRS system has ensured that there in an increase in the value relevance and the earnings of the company. Some may have adopted the IFRS voluntarily or may have imposed by the regulator but empirical studies have proven the success of the system.
(Epstien, 2009)
However, the adoption of and the enforcement of the standards has varied from country to country depending upon the strength of the regulator. Countries like China and India which have strict regulators may be apprehensive about the adoption of the system. But UK, USA and European Union have effectively adopted the system. Adoption of the IFRS system by big countries the made the system universally acceptable.UK has also given extra time to its public sector units to successfully adopt the system.
As most of the businesses and government bodies’ deal with organizations globally it is important to have a universally acceptable system of accounting. A universal system ensures easy dealings various organizations globally even essential for public- private partnership projects. Thus Australian firms should adopt the IFRS to ensure global compatibility with governments as well as private company operators globally as the IFRS has become an accepted norm in the European countries, USA and following soon are the developing economies like China and India.
6. References
• “UK GAAP: The Move to IFRS | Tax | Deloitte UK.” Deloitte | Audit, Consulting, Financial Advisory, Risk Management and Tax Services. N.p., n.d. Web. 13 Apr. 2012. <http://www.deloitte.com/view/en_GB/uk/market-insights/tax-reporting/tax-compliance-reporting/5aa5e81c8b1f7210VgnVCM200000b
• Wayment, Stuart . “IFRS and the public sector.” CIMA global 58.1 (2009): 1-13. Print.
• “Public sector focus: IFRS delay – 27 Mar 2008 – Accountancy Age .” Accountancy Age: news and advice for UK business finance professionals . N.p., n.d. Web. 13 Apr. 2012. <http://www.accountancyage.com/aa/feature/1783363/public-sector-focus-ifrs-delay>.
• Young, Ernst . “UK GAAP vs. IFRS The basics.” Ernst and Young Spring Report 2011 1.1 (2011): 1-38. Print
• Working, Paper. “Commission services working paper on governance developments in the IASB.” Economic and Financial Affairs Council 1.1 (2006): 1-38. Print.
• Epstien, Bary. “The Economic effects of IFRS adoption.” CPA Journal 1.1 (2009): 26-31. Print.
• A. Zeff, Stephen. “Some obstacles to global financial reporting comparability and convergence at a high level of quality.” British Accountancy Review 39.1 (2007): 290-302. Print.
JH44
But you can order it from our service and receive complete high-quality custom paper. Our service offers Accounting essay sample that was written by professional writer. If you like one, you have an opportunity to buy a similar paper. Any of the academic papers will be written from scratch, according to all customers’ specifications, expectations and highest standards.”
