ACCOUNTING POLICIES

THEORIES OF ACCOUNTING

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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

Difference of UK GAAP with IFRS

The reporting system in UK the globally accepted accounting principles has been based on IFRS as it was intended that UK GAAP will follow the IFRS. However it is to be seen how these were to be adjusted for the Small and Medium Enterprise (PricewaterhouseCoopers, 2009),

There are a few differences between the how UK GAAP and IFRS treat the accounting report.

These are:

Stock Valuation

Treatment of Intangible Assets

Cash flow statements

Operating Profit

Change in Accounting Policy

Treatment of Construction Contracts

Treatment of Deferred Tax

These differences have been discussed below:

1. Stock Valuation:

Under the UK GAAP the Last In First Out method can be used by the companies for the valuation of stocks however this is not permitted under the IFRS.

2. Treatment of Intangible Assets:

The Goodwill and intangible assets allows the amortization of goodwill over the expected useful life. This is restricted to the umber of years of useful life restricted to twenty years. In the case goodwill is deemed to be longer, the directors of the company have to undertake impairment review in the first financial year and the carrying value may not be fully recoverable in the coming years. In the IFRS the amortization is not allowed at all. The director on annual basis has to do impairment review.

3. Cash flow statements

The cash flow statements under UK GAAP are prepared under eight headings which are operating activities, return on investment, and services of finance and so on. However the cash flow under IFRS are prepared under only three headings which are operating services, investing activities and finance activities
The most distinguishing feature is that movements in net debt is not required to be reconciled under IFRS. Another important point is that small companies under UK GAAP are  not required to prepare the cash flow statement but this is mandatory under IFRS.

4. Operating profit

Presentation of the financial statements is not required and is optional under UK GAAP, but this required under IFRS and has to be clearly mentioned in the report.

5. Changes in accounting policy
The companies are allowed to change the accounting policy in the case it provides more clear and better analysis of financial statements however under UK GAAP the company has to ensure the accounting policy is appropriate and provide true and fair information. under IFRS the stress is laid upon the reliability of the facts.

6. Construction contracts
There is difference in approach in both UK GAAP and IFRS on how to estimate profits and how these should be presented based on the position of the contract and how reliably the profits can be estimated.

7. Deferred tax
Under UK GAAP the tax can be discounted to get the present day values of the deferred taxes. However it is rarely done by the companies but still it is allowed. Such discounting of deferred tax is not allowed

As claimed by Murphy there may not be a paradigm shift. However there will be huge efforts required on the behalf of both local authorities and the central authority to shift to IFRS accounting but such will not be a meaningless and unfruitful task as this way the accounting system for the whole world will be on the same lines. Thus Murphy is correct in saying that it will lead to more efforts been put by the authorities but will also help them in being updated with the accounting system of the central government and the private companies. Though at the start a lot of time will have to be provided and a lot of training needs to be given. But the Fair value method has been blamed all over the world for the collapse of financial markets. The solution to this issue is shift to IFRS.

Nature of local authorities and their goals

 

The local authorities have been like the tank of service provider like Police, Fire services etc. Thus the nature is of intangible in nature. The success of the local authorities has been in providing the timely support and services to the public. The key factor in the success of local authorities has been the minimum hindrance and interference in the working by the central government. Thus this level of service and efficiency may be affected as more efforts have to be put in. But IFRS will certainly be of assistance as there will be more clarity on the account of services that are being provided and the cost associated with it. With the training programs and assistance from the central government this clarity will be provided and the level of services and efficiency on the accounting reports side will be improved.

The adoption of IFRS by the local authorities has been a huge task as they prepared for it. The IFRS has been successful in improving the reporting of the financial statements. Those who are the supporters of implementation of IFRS for local authorities argue that it will assist in providing clear and easy to read and analyze.

Also the local authorities will have more time in preparing these reports and thus will be in a position to provide the information comfortably. Another reason why the local authorities won’t find it difficult to implement IFRS is because they already have the guidance and the experience from central government for the implementation of IFRS. However there are issues that need to be resolved and these are related to treatment of PFI contracts and the steps have been taken to resolve these issues. Thus IFRS didn’t seem to be quite a problem for local authorities.

The main point that might become an issue in moving towards the IFRS for local authorities as said by Richard Murphy is that it will lead to an increased work load and at the same time may not serve the purpose of making the accounts of local authorities easy and readable. The same has been argued by Peter Hayday who is the Director of Finance and Resources at Westminster. Another point that has been put forward by Hayday is that previously it was not required to have depreciated asset value and with the implication of IFRS the depreciation even for the previous years had to be accounted and the adjustment for this has to be made.

The local authorities needs to be addressed and shown that by shifting to IFRS it would be helpful for them to assess whether the investment made by them has been giving outputs or not or what steps need to be taken.

The major issues is for the multiple service departments wherein they may have more complex transactions and higher volume of information that might be related and may need more experience in order to prepare the reports. This may put pressure on such authorities and thus may not be as simple and easy to implement.

Fire and Rescue authorities may find it more easy to implement and the police authorities might be of the view that it will not be the most tedious tasks.

Another issue that the local authorities may face is the valuation of the property and the plant and equipments being used. The main issue is to reassess the property according to new revised categories of the IFRS. Firstly it is becoming difficult for the authorities to estimate the value of the assets. Secondly it is becoming difficult to re-categorize and estimating the value as per the reclassification. this can however be solved with the implementation of the IT skills and thus be handled when such accounts will be maintained on regular basis.

The other issues were getting the finance related values from the other departments and another important aspect being the maintenance of the register for the assets which is currently not being done.

Another issue being faced by the authorities is the of component accounting. This is the aspect requiring the accounting for each type of plant and machinery within each department.

the local authorities also face the issue of leasing, wherein they have to identify whether the lease exists or not and if the lease exists they had to review the leases, classify them and identify the embedded leases.

The authorities face the issue of disclosure also, of which the main was the segmental reporting disclosure.

International implementation of IFRS and its implication

Also in case of IFRS being implemented it will assist in enable comparability at the grass root level and assist investor in more information for investment although as stated by Murphy the investors will not invest in local authorities but such information provided by local authorities will simplify the study of information been provided other small and medium enterprise as all are linked to each other in some way or the other. This will lead to transparency and thus will reduce costs of the investors there by improving the chaos in business environment due to such discrepancies which lead to ambiguity in the system.

The transition cost may be high but the much of the costs associated are one time cost and thus will be more beneficial.

The case in which it is not implemented will result in the companies other than local authorities to prepare multiple reports a few to comply with the reporting of local authorities and other to make it as per the international standards for the investors.

Thus this will be more time consuming, will lead to more ambiguity, and require more knowledge and time on the part of investors. This may not be ideal for the economy as a whole and for the small companies which require more funds to be flown in for the growth/

It is in the interest of UK and not the Big 4 audit firms that such accounting principles be made applicable as it will assist in better controlling and open the prospects for local companies of the investment and thereby the boost in the economy. Also since it is been adopted by most of the countries of the world this will be in harmony with the world who have already adopted such policies.

The implementation of IFRS by USA has been studied and it has been seen that although such issues were raised but still the implementation of IFRS was not hindered looking at the uniformity and stability in the system that will be provided by IFRS and the kind of opportunities it will bring with it in terms of businesses growth and insight been provided to the investment opportunities (Emily, 2009).

This will reduce the cost associated with the audit firms as in the case if it is not made mandatory will lead to more fees been given to the audit firms for making the harmony between the two systems (Yoon, 2009).

Another reason as already discussed will be the reduced chances of misunderstanding both on the part of investor and local small and medium enterprise as far as investment is concerned.

The single accounting system will result in taking steps for the world as a whole rather than benefiting a particular economy. Thus will lead to congruent steps been taken by the world and with the assistance of experts across the world taking steps in one direction which will benefit more economies.

More innovative and modern thinking will be injected into the system as a whole as the more application will be put in towards taking steps for improvement rather than laying stress on the understanding and synchronizing the different systems.

As far as the issue of aligning the local authorities with the IFRS will be a costly affair and time consuming this can be done away with as there are major technological advances that assist in uniform and consistent transition and thus reduce the time required if not completely eliminating it. Thus technology has made it simpler for the transition and thus will support such transition.

In summary, IFRS will result in increased reliability on the accounting reports and thus will be investor friendly and cost saving decision although it is at the cost of extra efforts been put but will certainly improve the way the world looks at the investment decisions and the complexity of the system.

IFRS and Big4: A possible Alliance

The implementation of IFRS may not be said that the big 4 and the IASB are in some kind of cartel. It can be viewed as this as the audit firms will get business opportunities by this transition, but then there is nothing wrong in this. Also there are investments being made in the small and medium enterprise across the world then in that case if local authorities also become part of this regime will certainly benefit in preparing financial statements. Thus it is not in the interest of the local authorities only but also the in the interest of all the private companies that everyone who is supposed to prepare the financial statements does on the basis of common accounting system (Emily, 2008).

This might be considered to be benefiting the audit firms but this will lead to better analysis of investment propositions and this has been registered in the statements of many investment firms. It has also been seen that for non public local organizations the investment has been boosted by the international investors irrespective whether the country is developed or developing. Thus for the future investments  by the ways of joint ventures or any other way the accounting system if uniform will be of substantial advantage. UK GAAP may be insufficient to provide or fulfill all the necessary requirements.

Adoption of IFRS by local authorities in Australia

Looking at the experiences of the world on shifting to IFRS from GAAP Australia can also go in with implementation of IFRS. The issues of valuation and reporting issues may be addressed and suitable adjustments may be made to the same. Giving sufficient time to the authorities to switch to the IFRS will add to the comfort factor of the local authorities. Another point is that the local authorities may be given the option of shifting or not to the IFRS as the same may be of issue as discussed above like in case of multiple service departments. A lot of countries have already moved to the IFRS and thus shifting to IFRS will give harmony in dealing with the international businesses and policymakers being on the common platform.

Also the issues discussed above by Murphy may be reduced by taking into account the smaller version of IFRS which needs lesser effort and still abide by the IFRS guidelines. Also the IFRS has been implemented across more than 100 countries of the world thus it goes in favor of supporting IFRS by local authorities.

Conclusion:

As discussed above the local authorities need not be included in the IFRS accounting reports as it will certainly increase the load of accounting rather than concentrating on major issues and tasks of these authorities. This will be a major concern. However these issues if kept aside for some time and the main concentration is put on the uniformity of the accounting standard across the globe this may provide more points in favor of implementing this change.

A lot of countries including USA and UK have been going in for the change with a view to provide stability and uniformity in the system of the world as a whole thereby creating a common playground for the investors wherein the efforts related to synchronizing various accounting principles will be reduced and more insight will be provided to the investment rather than stressing on accounting reports and principles.

Australia has been the front runner in implementing such changes to maintain the dynamism in the economy and continuous movement for the welfare of the investors. Such change should also be made. But looking at the reaction of the world towards this change it may be prudent to put in more thought on how to implement such changes for local authorities so that such hassles may be avoided and what we get is more reliable and robust system which will be beneficial for the world as well as the Australian investors and small and medium enterprise in Australia.

The advantages of shifting have been discussed above and Australia being one of the major economies in the world which require more investments from across the world looking at the potential and strength of the economy such moves will certainly benefit the business environment. Also the lessons of the world will be the corner stone in implementation wherein the thoughts of these experts will assist in removing the bottleneck and look for solutions which will be kind of hybrid of what the world has implemented and what the best practices should be. Thus this system can be implemented in Australia with the assistance to local authorities for this transition will certainly be beneficial and make the accounting standards in Australia being uniform at the International level.

 

References:

  • PricewaterhouseCoopers, (2009), Similarities and differences A comparison of ‘full IFRS’ and IFRS for SMEs
  • Yoon N, (2009), Advantages and Disadvantages of switching from U.S.GAAP to IFRS
  • Christopher Parkes, (2009), Local authority adoption of IFRS: Implications for asset valuations http://www.eisneramper.com/Pros-and-Cons-of-International-Financial-Reporting-Standards.aspxAudit Commission, (2011), Countdown to IFRS in local government
  • Audit Commission, (2012), Making Local Authority IFRS account more accessible and understandable
  • PricewaterhouseCoopers, (2012), A practical guide to new IFRSs for 2012
  • Deloitte, (2011), IFRS in your pocket
  • CIPFA, (2009), LAAP Bulletin 80,
  • Greuning H V, (2006), International Financial Reporting Standard: A Practical Guide
  • PricewaterhouseCoopers, (2005), IFRS/UK main differences indicator
  • Chasan, Emily (2009),”Global accounting convergence plan seen on track.” Reuters, Thomson Reuters,

<http://www.reuters.com/article/GlobalFinancialRegulation09/idUSTRE53Q74Z20090427>.

Thomson Reuters,

<http://www.reuters.com/article/companyNews/idUSN1440000020080115>.

JC74

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