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In: Accounting

Case one: (25 marks) Intergovernmental working group of experts on international standards of accounting and reporting...

Case one:
Intergovernmental working group of experts on international
standards of accounting and reporting
1. What are International Financial Reporting Standards (IFRS)?
2. Many concerns are expressed in this article. List three factors that you think
are causing concern about the impact of adoption of IFRS.
3. Consider each of the three factors you mentioned in response to question 2.
(a) Is there empirical evidence to support the factor?
(b) Is the analysis leading from the factor to the concerns about adoption
of IFRS scientific or naturalistic in its approach? Explain your answer.

Case two:
1. On 1 January 2005 Australia adopted IASB standards.
(a) Do you agree with this change? Why or why not?
(b) Who stands to gain from Australia’s adoption of IASB standards?
Explain.
(c) Who stands to lose from Australia’s adoption of IASB standards?
Explain.
From 1 January 2005 the AASB will issue Australian equivalents to IFRS.
This process involves the AASB issuing IASB exposure drafts as exposure
drafts in Australia. Constituents can provide comments on standards to the
AASB and IASB. Final standards issued by the IASB are subsequently
issued in Australia with any additional paragraphs necessary to make the
standards suitable for public sector and not-for-profit entities.
Requirement:
Students are required to answer questions in an essay format (introduction, body,
conclusion

Solutions

Expert Solution

PART-1

  • International Financial Reporting Standards (IFRS) is a set of accounting standards developed by an independent, not-for-profit organization called the International Accounting Standards Board (IASB).The goal of IFRS is to provide a global framework for how public companies prepare and disclose their financial statements.
  • IFRS provides general guidance for the preparation of financial statements, rather than setting rules for industry-specific reporting. Having an international standard is especially important for large companies that have subsidiaries in different countries. Adopting a single set of world-wide standards will simplify accounting procedures by allowing a company to use one reporting language throughout. A single standard will also provide investors and auditors with a cohesive view of finances.
  • Currently, over 100 countries permit or require IFRS for public companies, with more countries expected to transition to IFRS by 2015. Proponents of IFRS as an international standard maintain that the cost of implementing IFRS could be offset by the potential for compliance to improve credit ratings.

PART-2

  • As part of a larger IFRS Review project, the AASB has published Research Report No. 3 – The impact of IFRS adoption in Australia: Evidence from academic research, to assist the AASB and Financial Reporting Council to assess the impact of IFRS adoption in Australia. Drawing from high-quality published empirical studies, the report shows that most of the research findings generally support the view that IFRS adoption by for-profit entities has benefited the Australian economy. Studies show that the quality and comparability of financial information has improved since adoption, and investors and analysts can better predict future performance of companies.
  • The AASB in recent months has also conducted nationwide outreach activities to gather views about IFRS from a wide range of stakeholders, including from the for-profit and not-for-profit sectors. The outcomes of this research will inform the AASB on how IFRS should be incorporated into its agenda consultation project and the Australian Reporting Framework in the future.

PART-3

  • Companies are required to recognise, present or disclose information in a different way.Yes. For example, adoption of IFRS in Australia also requires companies to recognise share-based transactions, which was not the case previously. The accounts of companies adopting IFRS differ from those of firms using different national accounting standards. The evidence used as the basis for the claims is naturalistic if it is evidence from firms’ individual accounts that underpins the claims by individuals in many cases. These accounts have been observed by individuals who have become concerned about the nature of the changes required under IFRS .However, if a research study has been conducted, say by academics, then that research study is likely to follow the scientific approach of analysing many firms’ financial statements, or reconstructions of their past financial statements, to come to a general conclusion regarding the view that firms are required to recognise, present or disclose information differently from their current approach.
  • List of Advantages of Adopting IFRS
  • 1. It allows for greater comparability.
    Businesses using similar standards to prepare financial statements can more accurately compare with each other. This is very useful when comparing businesses that are based in different countries, as they may otherwise have different methodologies and rules in preparing these documents. This greater comparability has aided investors to better identify where their investments should go.
  • 2. It is beneficial to new and small investors.
    The IFRS can help new and small investors by making reporting standards to have better quality and become simpler, putting these investors in a similar position with professional investors, which was not feasible under previous standards. This also entails a reduced risk for these investors when they trade, as the professionals will not be able to take advantage because the nature of financial statements will just be simple to be understood by all.
  • 3. It creates more flexibility.
    Using a philosophy that is based on principles, instead of rules, this set of standards will have the goal of arriving at a reasonable valuation with various ways to accomplish tasks. This would give businesses the freedom to adopt IFRS to their specific situations, which will result in financial statements that are more easily read and useful.

·List of Disadvantages of Adopting IFRS

  • It requires high costs.
    Whether large or small, all businesses would feel the impact if a country adopts IFRS. However, small companies would not have sufficient resources to implement the changes that come with it, not to mention that they would need to train staff or hire accountants or consultants for assistance. They would simply bear more financial burden than their larger counterparts.
  • It is prone to manipulation.
    As businesses can only use the methods that they wish, this would lead to financial statements show only desired results, which can lead to profit manipulation. While this new set of standards requires changes to how the rules should be applied to be justifiable, it is often possible for businesses to come up with reasons for making such changes. This means that stricter rules should be implemented to ensure all companies will value their statements in a similar fashion.
  • It is not globally accepted.
    Truth is, the US has not yet adopted the IFRS, so as other countries that choose to continue holding out as well. This means that accounting by foreign companies operating in these countries are facing difficulties because they have to prepare financial statements using such a set of standards and another set of principles that is generally accepted in these countries.

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