IFRs,
IFRs, which in full is the International Financial Reporting Standards are a particular set of principles governing accounting. The board responsible for formulating the standards is the International Accounting Standards Board. These standards are the basic rules and regulations governing how the financial statement should be made. These standards promote transparency, consistency and similarity all over the world. The business thrives by having a common ground of understanding because they are equals, and some countries cannot claim that the standards have favouritism on other countries. The IFRs is their common language, so to speak (Australian Accounting Standards Board, 2015). IFRs have been adopted globally by over 100 countries, which are commonly referred to as G20 jurisdictions. The G20 symbolizes a group of twenty, which is made up of 19 central bank governors and the European Union. Major Asian countries are also part of the alliance.
Australia is part of these countries and our main focus in this article. The board in charge of Australia is the Australian Accounting Standard Board (AABB) (Australian Accounting Standards Board, 2015). IFRs were first adopted in Australia on January 1, 2005.
Role of AABB in Australia
- The AABB is tasked with having to create a model that can be used to gauge and evaluate the standards that have been suggested and yet to be put to use. This helps to eliminate unnecessary rules that are overbearing and pointless.
- Earlier on before the IFRs were adopted, this board was responsible for formulating accounting standards in Australia. This task has, however, not changed much because the board is the custodian and regulators of the IFRS. They ensure that companies follow and implement the standards..
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- The board is also a significant stakeholder in the creation of accounting standards that are applicable in other parts of the world.
The standards that have been set aside by the AABB apply to entities of public and private nature, whether profit or nonprofit (NFP). FOR NFPs, the IFRs were used from the word go when they were starting. The NFPs were, however, given the choice of manipulating and maneuvering their way around the standards to suit the particular organization’s needs while keeping in mind factors such as the issues affecting the organization since they vary from one organization to another. Another critical factor that influenced how the standards would be altered included the analysis made regarding the costs of adopting the IFRs and the benefits of the adoption.
After choosing to change their status in 2005 to accommodate IFRs, the standards were only applicable to profit entities at the time. In the beginning, Australia was not entirely sure about the move (IFRS, 2017). Unlike other countries that adopted the big bang adoption of IFRs, which necessitated full turnover of the countries accounting standards to those of IFRs. The reason behind this heightened failure on the part of Australia is because they were among the first country to be assimilated into the IFRs program. They, therefore, feared to fail. In addition to this, the big bang adoption mechanism required a lot of money to change completely. Money that Australia was not willing to risk at the moment.
For this reason of fear of failure during the initial stages, Australia had the standards altered to suit their needs. Some accounting policy options were done away with while some disclosures were added. As Australia got accustomed to the rules, they felt the need to revoke the changes made earlier on and decided to go with the initial guidelines of IFRs in 2007. some disclosures that had been added were, however, retained (IFRS, 2017). The IFRs standards were adopted bin Australia involuntarily, and all companies had to take the new standards.
Benefits of IFRs in Australia
Companies that adopted IFRs have been able to catch the eye of more analysts. More analysts, therefore, means that forecasts made on the company’s performance are entirely accurate in comparison to when the company does not have the attention of any analyst. This assisted in putting many companies on the global map (IFRS, 2017).
- The IFRs have necessitated the increased value in financial information. Any entity needing assistance in financial details will have to cough up more earn. In addition to this, firms that were affected by the IFRs were engaged in managing funds less and less. No firm was interested in the work because they knew where the gold mine was, and that was in providing financial information.
- The standards which stipulate for accountability and transparency in creating the financial statements lead to improved accounting quality. Problems such as redundancy and omission of data was avoided. The information that was made available was also regulated since not all information should be given out in the financial statements.
- Since the standard was applicable to other G20 jurisdictions, the financial reports were in a database that allowed comparisons to be made to evaluate performance and rankings with their competitors.
Companies that followed the guidelines had more capital in their hands. The reason behind this is that the companies were now noticeable to countries in other parts of the world, therefore, attracting possible foreign investors (IFRS, 2017).
The trading that went on considerably increased. The standards made the company more reliable and proved to analysts that they could handle more trade. More analysts meant more recognition and accuracy in their financial statements because the more the analysts are working on the financial statements, the lesser the number of inconsistencies in the audits. The analysts would, in turn, put in the right word for them, thus increasing trading in the long run because word on their credibility had circulated (Deloitte, n.d.).
- The IFRs also facilitated the broadening of horizons and diversifications. The common standards governing businesses ensured that countries with the IFRs standards were one, and they could get into trading together. The measures made it possible for the states to trade together to consider working together and strengthening their ties by opening their doors for more branches of the companies to be set up in their countries. By doing so, international cooperation is achieved, which will finally also lead to world peace because the states are not in conflict.
- Business dealings with the G20 jurisdiction countries were fast and effective. Time, money and labour was maximized and not wasted because the reports generated were all the same because the standards were one and the same. Multiple reports were, therefore, not made. A single report was made and then sent to the countries (Brown, 2011).
- Companies with a lower quality of information prior to the adoption of IFRs showed a positive trend in terms of quality of information (Bryce, Ali & Mather, 2015). Companies that also had a lower risk of being caught up in wrangles with other companies and have to solve the dispute amicably by coming to an agreement that suits both companies; litigation also benefited. In addition, companies that were at a higher risk of failing to pay debts also benefited from this (Brown, 2011). By this taking place, the credit market was greatly influenced, and the loans that a company was legible for earlier on increased.
Limitations of IFRs in Australia
Many countries that adopted the IFRs system either have a positive impact, negative or no changes at all were experienced by making the change. The following limitations were experienced in Australia
- Australia’s demographic on company sizes that the economy is made up of small scale companies and that very few companies are enormous. The IFRs have tended to impose extremely high costs on the small scale companies to afford because they have a tight budget allocated for such things. SMEs, therefore, have minimal resources, and the number of staff is limited. Incorporating the new standards would, therefore, require for the old team who were initially well acquainted with the previous model to be enrolled in classes which are added costs to the company
- Businesses cannot only be narrowed down to countries where the IFRs system is used. Businesses have to evolve to also other parts of the world. For instance, since the US does not commit to the IFRs, Australia cannot claim to not carry out business with one of the world’s largest economies because they subscribe to the US GAAPs. The adoption of the IFRs has created a rift between countries without the system, making it hard for a business to be conducted.
- IFR standards demand transparency in financial statements. This, however, may be taken for granted because some information is required to be filtered out and not made available in those financial statements. Thus paves the way for corruption and fraudulent workers to embezzle funds because they can easily cover their heinous acts without being spotted. In addition to that, the omission of information can make company accounting sections devise ways that can generate more money for the company that is of the books and often does not support the IFRs system.
Different GAAPs range from country to country. Some countries support GAAPs that was not forced upon them while others prefer to go by the books and follow what their country requires (Sabel Maria Estima Costa Lourenço & Manuel Emílio Mota de Almeida Delgado Castelo Branco, 2014). This means that different standards belong in different countries. For every system, a particular audit check and financial system m should be generated. Every financial statement made should be the same as that of the country it belongs to. This fact alone overworks the accounting teams in the companies in Australia. Multiple copies that are at per with the scope of the guidelines of the accounting standards as per country are generated. This, in addition to the overworking of workers, causes time wasted because the valuable time that is of the essence for other company dealings is dedicated to the generation of these multiple financial statements.
- The change of IFRs was not accepted by all companies since it was forced upon them. Most of the staff working at the time were proficient with the previous Australian GAAPs. The teaching of the new methods had to be incorporated into the curriculum offered in business schools to ensure that they are speed and can maneuver through business unscathed with the knowledge on IFRs. This was challenging at first for the new curriculum to take effect and be accepted. Another problem that emanated from this is that many layoffs were carried out at the time. The members of staff who failed to adhere to the rules and learn the new ways had to be fired and give room to the fresher young minds.
Finally, the main problem experienced during the first years of bringing these IFR standards to life was that the whole outcome was speculative. The result of choosing the method was unknown, and the likelihood of failure was still expected. The uncertainty arising at the time also necessitated the change to be done gradually and not using the big bang method to avoid loss of funds. The IFRs system in Australia, however, costed so much money that companies did not afford earlier on because they were not stable enough (Sabel Maria Estima Costa Lourenço & Manuel Emílio Mota de Almeida Delgado Castelo Branco, 2014). Factors that may have impacted the choice of Australia in joining the IFRs. The variable issues that must have driven Australia to adopt the standards are international trading, financial markets and the influence on corporate governance.
Financial Markets Influencing IFRs Adoption
International trade between countries is quite profitable, and most countries would do anything even to adopt new policies to assist them in acquiring more. The idea of IFRs in Australia was accepted because with IFRs cost of information for companies was reduced. The reduction of the cost of data means that international operation was encouraged. The cost of information was shared between stakeholders; trading partners (Chua, Cheong & Gould, 2012). The knowledge acquired was paid once, and the data used to benefit all entities trading in partnering countries. Quite frankly, the exportation of goods to other countries was quite profitable. Australia was, however, conflicted because the investment for exportation was expensive. Investment earlier on was quite a gamble because the proceeds of the investment had not been received. The companies were not sure if investing was the right decision if there was no money-back guarantee. The IFR standards proved to be God-sent because the audit checks are done ensured that companies that were interested in delving straight into and salvaging in international trading were risk-free because the financial statements that were availed confirmed the reliability of the trading partner and that profits would be received.
Corporate Governance on Adoption of IFRs
Corporate governance is the group or board that is responsible for controlling the businesses that are running in the country by ensuring that all the rules are followed. Corporate governance is put in place to ensure that transparency is achieved in business dealings and that all the interests of stakeholders involved in a business are safeguarded and maintained. Corporate governance was used to influence Australia’s decision to use IFR standards because Australia had strong corporate governance (Kabir & Rahman, 2016). Stronger governance meant that the system was credible and transparent since no information was hidden.
Financial markets
Most governments have never been able to influence financial markets because it is beyond their power, and the capital markets are determined by a set of variables. Financial markets have been made global to ensure that no country feels left out. The financial markets influenced the adoption of IFRs in that with the globalization of financial markets, and there was a need to promote a set of standards that were neutral to all parties (Bissessur & Hodgson, 2012). By doing this, countries only had to generate single copies of the financial statement and give it to other jurisdictions that evaluated the statement and its compatibility with their agenda. The transparency created would, therefore, increase capital because the firms were well represented in other parts of the country. More foreign investors would, therefore, allocate their firms to these firms because everyone always wants to be on the winning side and investing in the right firms means more dividends and profits of all shareholders.
The stock markets that have been known to be part of the financial markets played a huge role in Australia, adopting the IFRs (Bissessur & Hodgson, 2012). The returns on the stock market are determined by the quality of the information that is in financial reports. Higher quality means a better stock market. Australia adopted this to ensure that their stock markets were high enough and the country’s firms were generating quite a lump sum at the end of the period of investment. In addition to influencing the stock market returns, the Australian AASB wanted faster stock markets. The speed of the stock market would be determined by the standards available. The accounting standards would save on time and money that has been set aside for other purposes. The IFRs standards being transparent means that information is offered without hiding any disparities that may exist in a firm. The time that would have otherwise be spent performing other audit trails because the financial statements offered are not from credible sources is used in other investment options. The stock market exchange program, therefore, takes up lesser time because IFRs ensured a trustworthy and exact financial statement was provided.
Conclusion
To sum it all up, it is evident that the benefits of adopting the IFR systems in Australia were experienced later on after the country became proficient in its dealings. A lot of scrutinies have been made in Australia for choosing the international standards by countries that have not yet adopted the system. It is, therefore, necessary for the standards to be made suitable for all countries to avoid the problems that Australia has been faced with over the close to two decades of using the system (Bryce, Ali & Mather, 2015). The limitations should not overrule the fact that the standards have assisted in creating a greater economic influence of Australia to the rest of the world without much disparity because of the transparency and accountability that is maintained. The loopholes that have emerged over the years to avoid or alter the standards should be covered to ensure that the credibility remains intact. As much as the adoption of IFRs was agreed upon, some firms are still reluctant because they are SMEs, and they cannot afford to adopt the new changes. The IFRs should find a way to accommodate these entities without having to render the firms bankrupt or out of service.
In a nutshell, it sane for judgment to be passed on Australia that choosing the IFR standards has brought more harm than good. This is, however, not a guarantee that the same effect is experienced in other countries because the economic and political factors vary in different countries. The results expected are, therefore, dependent on these factors. The results may be positive, negative in nature or also undeterred. The adoption may not cause any significant changes because the GAAPs that existed in those countries prior to the adoption of IFRs were well established and took care of all the problems just as the IFRs would hence the lack of considerable changes. The international standards have levelled Australia with its global competitors and helped in their economic superiority.
References
Australian Accounting Standards Board. (2015, August). Accounting Policies, Changes in Accounting Estimates and Errors. https://www.aasb.gov.au/admin/file/content105/c9/AASB108_08-15.pdf
Bissessur, S., & Hodgson, A. (2012). Stock market synchronicity–an alternative approach to assessing the information impact of Australian IFRS. Accounting & finance, 52(1), 187-212.
Brown, P. (2011). International Financial Reporting Standards: what are the benefits?. Accounting and business research, 41(3), 269-285.
Bryce, M., Ali, M. J., & Mather, P. R. (2015). Accounting quality in the pre-/post-IFRS adoption periods and the impact on audit committee effectiveness—Evidence from Australia. Pacific-Basin Finance Journal, 35, 163-181.
Chua, Y. L., Cheong, C. S., & Gould, G. (2012). The impact of mandatory IFRS adoption on accounting quality: Evidence from Australia. Journal of International accounting research, 11(1), 119-146.
Deloitte. (n.d.). Use of IFRSs by jurisdiction – G20 domestic listed companies. https://www.iasplus.com/en/resources/ifrs-topics/use-of-ifrs-g20
IFRS. (2017, June 23). IFRS APPLICATION AROUND THE WORLD JURISDICTIONAL PROFILE: Australia. https://www.ifrs.org/-/media/feature/around-the-world/jurisdiction-profiles/australia-ifrs-profile.pdf
Kabir, H., & Rahman, A. (2016). The role of corporate governance in accounting discretion under IFRS: Goodwill impairment in Australia. Journal of Contemporary Accounting & Economics, 12(3), 290-308.
Sabel Maria Estima Costa Lourenço, & Manuel Emílio Mota de Almeida Delgado Castelo Branco. (2014, January 31). Main Consequences of IFRS Adoption: Analysis of Existing Literature and Suggestions for Further Research. http://www.scielo.br/pdf/rcf/2015nahead/1519-7077-rcf-201500090.pdf