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. Executive Summary

Introduction of IFRS will have substantial impact on the practises followed in reporting financial statements and thereby impacting economies globally. In this study we have tried to analyse the pros and cons of implementing IFRS. The present study also reports certain points to explain the rationale behind removing stewardship accounting in IFRS. It also explains how IFRS is meant to serve the public interest and is not a business tool for the Big 4 companies. In this study we have also tried to explain the importance of implication of IFRS in local authorities.

2. Introduction

International Financial Reporting Standards commonly termed as IFRS has been developed by IASB (International Accounting Standard Board) and are already applicable in more than 100 countries. IFRS are generally used in the preparation of Balance Sheet and other financial statements. Every country has their own accounting standards, and profits computed on the basis of different accounting standards lead to different yields. Thus in order to avoid this divergence one should have uniform accounting standards t arrive at uniform numbers. But one cannot change these historical accounting standards overnight. It is a long and tedious job. Also, generally such changes are not easily accepted by everyone and suffer from criticism. Same is the case with IFRS. Introduction of IFRS will have substantial impact on the practises followed in reporting financial statements and thereby impacting economies globally. In this study we have tried to analyse the pros and cons of implementing IFRS. The present study also reports certain points to explain the rationale behind removing stewardship accounting in IFRS. It also explains how IFRS is meant to serve the public interest and is not a business tool for the Big 4 companies. In this study we have also tried to explain the importance of implication of IFRS in local authorities.

3. IFRS IMPLIES A MAJOR PARADIGM SHIFT

IFRS will lead to Europe’s ‘greatest accounting change process in history’. Taxation, jurisprudence and regulations were the three main bases behind the creation of ancient European accounting rules. The application of IFRS will make these accounting rules more inclined towards capital market. Under the UK GAAP financial statements are prepared on the basis of historical cost method; but IFRS uses fair value accounting. Thus, this dramatic shift from historical cost method to fair value accounting can be termed as the most significant effect of IFRS in Europe. The numbers derived through fair value accounting depict the true economic conditions of the entity preparing the financials.  If that indicates prominent variations then in actual sense that entity may face these kinds of fluctuations in its future earnings.  Thus the changeover to IFRS will bring out the several elements that have bearing on the company’s ability to generate future cash flows and the risks associated with them. Once the fair value accounting will be implicated, the management will be held responsible to explicate the reasons behind the wavering results and investors will be able to make up their mind whether these variations are temporary in nature and has no impact on the performance of the company or whether they will impact the earning visibility of the company. A crucial effect of Europe’s changeover to IFRS will be on debt as well. Under IFRS, all derivatives are to be reported at fair value on the balance sheet. In addition one has to consolidate all subsidiaries and off-balance sheet financing vehicles. In comparison to UK GAAP, the IFRS follow more rigorous approach while classifying leases as financial leases. While disclosing value of financial lease obligations on the balance sheet one has to consider present value of the future lease payments. In addition, IAS 19 requires companies to report the present value of defined benefit obligation schemes and the fair value of the plan assets. Moreover, under IAS19, companies are required to report mention the present value of defined benefit obligation schemes and the fair value of the plan assets. As a result the terms that are dependent on the debt/ equity ratio of the companies may fall out as the heightened debts that companies used to report may come down at their  normal levels. This will bring down companies gearing ratios which will have an automated impact on the share price of a company. The execution of IFRSs would bring down information imbalance. This will lead to an unruffled flow of communication between various participants in an organisation. Improved flow of information will also result in lowered equity and debt financing cost. The foundation of the financial reporting under IFRS is to ‘generate information useful in making decisions’. UK GAAP is based on accrual accounting over a period of time and at the end of the time scale under consideration the transactions should get matched. Under this process balance sheets are used to measure the balances. In contrast to UK GAAP, IFRS measures a value at a particular time and compare it with the value of same item at some different point of time. Thus in case of IFRS balance sheet holds key importance than the profit and loss account.

4. IFRS AND STEWARDSHIP ACCOUNTING

Under IFRS, stewardship and accountability has not been included as an explicit objective of financial reporting by business entities. In order to understand the reason behind the same let us understand the meaning of Stewardship and Accountability first.

4.1. What is Stewardship?

As per the dictionary definition Stewardship is derived from the base word steward. Steward literally means a person who manages the affairs of an estate on behalf of his employer (Compact Oxford English Dictionary); One who manages another’s property, finances, or other affairs (Webster’s II New College Dictionary); A person who manages another’s property or financial affairs; one who administers anything as an agent of another or others ( Random House Webster’s Unabridged (1987)); A person appointed in the place of another (Black’s Law Dictionary). The term stewardship has been used many times in different contexts. Many times it is used to differentiate the functioning of management of reporting entity and the functioning of entity. Many times it is used to refer the custodianship or safekeeping of an asset.

4.2. What is Accountability?

Webster’s II New College Dictionary defines accountable as: (a) “required to render account: answerable” and (b) “capable of being explained.” Black’s Law Dictionary defines accountable as “responsible, answerable, explainable, justifiable, or liable.” Term accountability is used with many similar meanings in accounting literature. The citizens of a country have all the rights to know how their hard earned money is being utilised. Accountability of Government is based on this right only. In a democratic society, in order to fulfil the government’s duty to be accountable to public. For this purpose financial reporting plays a major role.

As per the IFRS, stewardship has been outlined as an informant of management’s performance. As per the IFRS, assessment of responsibility of the stewardship for an asset through historical cost is not an appropriate measure. Stewards who are taking care of an asset are not only responsible for custody and safekeeping of those assets but also to make efficient and effective use of those assets. The way an investment is performing is an important factor that indicates the effectiveness of stewardship responsibility.Under IFRS one measures the changes that takes place in the fair value of an asset in order to determine the impact of stewardship. In case historical costs are considered instead of present fair value, this information can be assessed only at the time when investments are being sold. In order to explain the actions that stewards take, disclosures are the best source not the accounting principles.

5. Implication of IFRS in local authorities

In order to ascertain consistent rules based accounting system globally, IFRS move on the radical of providing disclosures. PFI schemes accounting, derivative treatment and lease accounting – these are the three areas where IFRS is of utmost importance when we talk of IFRS in public sector. In order to assess the PFI schemes in most appropriate manner, an entity will be required to examine the original contract and the financial model that have been used in these scheme. Under IFRS one need to differentiate between land element and building element while talking about property lease. Further, it will be bifrgated as operating lease or finance lease. This practise is not followed as of now.  Under IFRS, government agencies will be required to look for embedded derivatives ( embedded derivative can be defined as an instrument which has the capacity to cause cash flow within the contract) and then decide whether they should be accounted separately or not depending upon the fair value of embedded derivative. Under IFRS, there are stricter requirements to include accruals for staff benefits such as accrued leave.

6. IFRS serves the public interest

IFRS is a global accounting language which will have international acceptance and will provide a common accounting platform in each and every part of the world. In this era where world is converging internationally there is need of accounting standards which have universal acceptance. Accounting in accordance with IFRS will mean that the transactions of similar nature will be recorded in similar manner everywhere leading to same set of financial statements. This will reduce the efforts and time of investors who compare similar companies of different countries. Flow of capital will be more efficient, costing will come down and host of constituents will get advantage of the single system of financial reporting. While more and more businesses are transitioning to a global economy, by adopting IFRS, all businesses worldwide will present its financial statements on the same basis and foundation. This, in turn, will give U.S. businesses a competitive advantage with its foreign competitors since equivalent disclosure of companies’ financial performance will be more comprehendible and easier to compare to investors, businesses, and the general public. In case of multinational companies which have their existence in various countries, lack of consistency make their financial reporting complex and difficult to understand. Once IFRS will come into action; partnerships, cross-border acquisitions, and development of cooperation agreements with foreign entities will become much more easy and sustainable. Thus, implication of IFRS will definitely benefit the performance of global economy thereby benefitting public in large.

7. Conclusions

In this study we have analysed the pros and cons of IFRS. Introduction of IFRS is definitely going to change the world of accounting in the world. The historical accounting standards which are being implemented for centuries will change drastically. Loads of human efforts need to be put in to bring these changes. Financial situation, when these ancient GAAPs were formed were entirely different. These financial changes have changed drastically over a period of time and now we need some standards to bring world closer. Stewardship accounting is an important aspect of UK GAAP but with introduction of IFRS this will also go under a sea change. In present times where public sector is also undergoing a sea change, then their accounting and financial policies also need to be reinvented. IFRS is in its infant stage where whole lot of research is still needed to make it more wide and suitable as per the need of different countries and their financial requirement. For example in one country local authoritie play a major role and in another one private companie are the key growth drivers. When IFRS will be implemented Globally it will be used by various people in various context thus it cannot leave any stone untouched.

8.References

Accounting Standard Board (1992)

Accounting Standard Board (1997)

Accounting Standard Board (1997)

Andersen, BDO, Deloitte Touche Thmatsu, Ernst & Young International, Grant

Thornton, KPMG (2001), ‘GAAP 2001. A Survey of National Accounting

Rules Benchmarked Against International Accounting Standards’ in Nobes, C.

(ed.) GAAP 2001. A Survey of National Accounting Rules Benchmarked

Against International Accounting Standards.

Hoogendoorn, M. (2006), ‘International Accounting Regulation and IFRS

Implementation in Europe and Beyond – Experiences with First-time

Adoption in Europe’, Accounting in Europe

International Accounting Standards Board (2003), International Accounting Standard

International Accounting Standards Board (2004), International Accounting Standard

International Accounting Standards Board (2004), International Accounting Standard

290-302.

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