Describe about the Contemporary Accounting Theory for Business Affairs.
International Financial Reporting Standards (IFRS) is an international language related to business affairs in order to improve the understanding and comparison of the organisation accounts across global boundaries. In this context, Crawford et al. (2012) cited that the accountants of the global organisations are required to maintain the books of accounts in compliance with this standard for presenting the same to both internal and external users. Therefore, the current report focuses on critical elaboration of the usefulness of IFRS for sustainability reporting. The latter segment of the study sheds light on the use of accounting standards in the chosen country of Australia for supporting sustainability reporting.
Current and potential usefulness of IFRS for sustainability reporting:
The major usefulness of IFRS in order to maintain the sustainability in reporting standard is briefly enumerated as follows:
Academic Literature:
Focus on the investors:
The primary usefulness of IFRS is that it is highly accurate, timely and provides wide-ranging information of the financial statements of the organisation. Along with this, the investors are able to understand the information presented in the financial statements without the need of the sources, which provides the investors with greater information (Ozkan, Singer and You 2012). For instance, after the adoption of IFRS in 2005 by Woolworths Limited, the organisation has credited the amortisation value of goodwill back to the income statement while computing the net income (Investegate.co.uk 2016). However, Crawford and Power (2015) argued that the extraordinary income or loss could not be included in the financial reports of the organisation, which has been a major issue in recent times.
The detailed presentation and harmonisation of the reporting standards under IFRS result in zero payment for the investors in terms of processing and adjustments to the financial statements. This is because the breakdown of the reports in accordance with the IFRS guidelines helps in better understanding for the investors. Hence, it saves the fees to be incurred to the analysts for understanding the financial statements. Thus, it would help in ensuring the sustainability reporting by minimising the cost of equity capital for the firms. As a result, it would increase the stock price along with potential opportunities of attracting new investments.
The major characteristic of IFRS includes realising the immediate loss, which aims to benefit the investors, lenders and other associated stakeholders of the organisation (Apergis, Eleftheriou and Payne 2013). The transparency and loss realisation of IFRS raises the contracting efficacy between the organisations and their management. Thus, it would help in enhancing the corporate governance procedures of the organisations.
In addition, this realisation of loss triggers the issues at the time the organisation encounters economic loss, which would be delivered to its key stakeholders. Furthermore, the company would be able to review the book values of asset and liabilities, equity and earnings (Barbu et al. 2014).
Comparability:
The junction to IFRS has resulted in improvement of the financial statement comparability of the companies operating in the European Union. This has been accomplished by adopting the identical reporting standard in a single market of EU (Barbu et al. 2014). However, Kajüter and Nienhaus (2015) argued that the focus of IFRS is to recognise the ways, in which the companies make disclosures, measurements and realisation of items. After the adoption of IFRS, the organisations have adopted an approach, which have reduced the changes from the past national standards.
Standardisation of financial reporting and accounting:
With the help of IFRS, the organisations are able to standardise the process of financial reporting, which ultimately results in greater comparison of financial statements in the financial markets. In addition, the trade barriers are removed, which would help the organisations to win the trust and confidence of the equity investors (Atwood et al. 2012).
Ensuring transparency in financial reporting:
This attribute is also of the major benefits of transferring to IFRS, since the makes the member countries of the European Union consistent on the different aspects of the macroeconomic environment. In addition, IFRS also ensures the consistency of financial reporting to enhance the relationship between the organisations and the investors amongst the member countries.
Greater reach to the global capital markets and investments:
Since, many global organisations have adopted IFRS, it has increased the chances of the organisations to access to the other capital markets by preparing the financial report under one single reporting standard. The primary reason of adopting this accounting standard is to make a better comparison in the global capital markets in order to increase the focus on investors. In addition, the companies are liable to disclose its corporate governance policies in its annual report for promoting sustainability reporting in compliance with IFRS.
Professional literature:
“Benefits of IFRS would start to flow in 2018: Ian Mackintosh”:
The financial information could be compared, if the IFRS adoption diversifies including more countries. However, the situation might be worsened, if two organisations from the same nation use different accounting standards to present their financial statements. In this context, Dey (2016) stated that the local market is adversely influenced because of the gap between book and market values, if IFRS is applied with the other national reporting standards.
However, the usefulness of IFRS in terms of sustainability reporting is not significant in short-term, when it comes to comparability of the financial statements. This is because IFRS is yet to enter in few countries and the harmonisation of the standard has not been fully accomplished by the member countries. However, it has been found that IFRS has shown its usefulness in the medium-long term.
Hence, for improving the comparability of the financial statements, the organisations need to follow the same set of rules by adoption of IFRS. The unconsolidated statements could be developed under IFRS irrespective of the firm size for ensuring the consistency of the financial statements. In addition, the social disclosures and environmental disclosures of the organisations are mandatory under IFRS for complying with the sustainability reporting.
Hence, based on the above discussion, it could be inferred that IFRS helps in ensuring the transparency, consistency and comparability of the financial statements of the organisations for improving the decision-making process of the associated stakeholders.
Current or potential use of accounting standards in Australia for supporting sustainability reporting:
Academic Literature:
Improved quality of financial reports:
As per the research of the Australian Accounting Standards Board (AASB), the quality of the financial reports of most of the global organisations has increased after the mandatory adoption of IFRS. This is because the “value relevance of accounting reports” has been largely improved along with fall in the number of companies, which are involved in earnings management. In addition, IFRS adoption in Australia has further improved the quality of accounting through “goodwill impairment” regime (Baskerville and Rhys 2014). However, as argued by Kaaya (2015), the treatment of intangible assets under IFRS was inappropriate in contrast to the Australian GAAP.
Comparability of financial reporting:
With the help of IFRS adoption, most of the Australian firms have improved the comparability of the practices of reporting with their international peers. This is because the consolidation of the income statement has been clearly represented in the annual report for greater understanding of the investors. As a result, the investors could undertake their courses of action based on the market exposure of the firms indicated in the ASX (Franzen and Weißenberger 2015).
Improvement in the valuation of intangible assets:
The most notable feature in the Australian firms after the adoption of IFRS is the reporting of intangible assets, which could be expected by the investor by utilising the information under AASB 147. Previously, the intangible assets that are purchased at cost are realised, while the in tangible assets generated internally are not realised. The intangibles that are re-valued previously in the past need to be written down to the historical cost. This is because a firm is not able to retain its revaluation in the absence of any secondary market (Houqe, Monem and Clarkson 2013). Thus, it has ensured sustainability reporting on the part of the organisations for delivering necessary information to its stakeholders.
Integration of the non-financial users into business strategies:
With the help of IFRS adoption, the Australian firms are able to provide a broader depiction of the business performance, which could not be provided through traditional financial reporting. This is because the Australian firms need to depict the utilisation and resource dependencies to its various stakeholders (Odia and Imagbe 2015). In addition, the relationship of the resources with the environmental, economic and social spheres and their probable impact is disclosed in the annual report of the firm.
The above-mentioned information is crucial in order to provide a meaningful evaluation of the long-term business model and strategy. Moreover, the firm would also be able to fulfil the information needs of the government and its associated stakeholders (Perera and Chand 2015). Since, IFRS helps in promoting sustainability reporting, the Australian firms have been able to improve the apportionment of scarce resources.
Minimisation in information cost:
In the contemporary era, the Australian firms have wide pool of opportunities to engage in global trading activities and accumulate capital from cross-borders. Under Australian GAAP, the cross-border investors observe the presence of risk related to accounting in the financial statements. Therefore, after the adoption of IFRS, the regulators of capital market would be aware of a single accounting standard and the Australian organisations have increased efficiency in accumulating funds (Nulla 2014). As a result, it has contributed to minimising the processing cost of information to the Australian economy.
Appropriate presentation of financial statements:
Adoption of IFRS in Australia has provided clear and concise preparation of financial statements. This is supported by the standardised measures for realisation, measurements and financial transaction disclosures. Due to this, the complexity in computing the global taxable income of the Australian multinational firms is lowered, since the taxes are imposed on the overall incomes of the organisations (Mironiuc, Carp and Chersan 2015). However, the mother firm and its foreign subsidiary need to follow the identical accounting standard, IFRS for tax computation.
Listing on the global stock exchange:
After the adoption of IFRS, most of the Australian firms have been listed on the global stock exchange by preparing their financial statements in the globally accepted financial standard. As a result, it has helped in listing the stocks in the foreign stock exchange much easier and convenient (Procházka 2016). Prior to IFRS adoption in Australia, the firms are facing difficulties to place their stocks in the cross-border stock exchange due to different accounting standard.
Before the adoption of IFRS in Australia, the investors often find it difficult to compare the financial statements, as the different transactions are treated in different ways. However, IFRS has helped the Australian firms to compare their financial statements across different industries functioning in different locations. In addition, the investors are also able to anticipate the future standing of the organisations and accordingly, make investment decisions.
Adjustment to the accounting systems:
In order to comply with IFRS, the organisations are required to incur transaction cost for adjusting their accounting systems. In addition, the Australian firms also need to update the methods of internal control and document the same. Furthermore, IFRS requires the Australian firms to present their financial reports for a prior year. The external consultants have been recruited to provide training to the staffs and familiarise the investors with the procedures of preparing the financial statements (Kajüter and Nienhaus 2015).
Relevance in the accounting procedures:
The adoption of IFRS in Australia has ensured sustainability reporting by placing greater concentration on the economic constituent rather than the legal form. This has helped the organisations and their associated stakeholders to depict true value of the business transactions. In addition, the gains and losses depicted in the income statement of the Australian firms have placed the same in a trustful and reliable position in the eyes of the investors. The investors, before making any sort of investment decisions, lay emphasis on the corporate disclosures along with the fluctuations in the share prices of the stock market index (Crawford et al. 2014). The IFRS adoption has definitely helped the Australian firms to reduce their cost of equity capital by drawing adequate number of investments from the investors.
Furthermore, the balance sheet statement after the IFRS adoption in Australia, has been highly modified because of its layout and the level of consistency. Thus, it depicts a fair representation of the asset and liability values of the organisations to help the investors and analysts in evaluating the financial performance of the business. Lastly, the managers of the big Australian firms could not manipulate the books of accounts for generating hidden reserves under the IFRS standard. Thus, the accounting standard is highly oriented towards the shareholders; thereby ensuring sustainability reporting procedures.
Professional literature:
“IFRS – where are the benefits?”:
As per the media reports and the comments of the members regarding complexity and growing disclosures, the benefits of adopting IFRS in Australia have been questioned. After the adoption of IFRS in 2005 by Australia, the accounting profession has encountered several challenges due to the complexity of IFRS rules and guidelines (Charteredaccountants.com.au 2016). The main objective of this paper is to review the big picture and the far-reaching aim of IFRS.
With the rising competition in the global marketplace, global comparability is vital to ensure efficient apportionment of scarce resources. In order to achieve international comparability, the major countries need to adhere to a single accounting standard. It has been a global issue today for the investors to understand the complexity of the IFRS rules and regulations. Therefore, the government and standard setters of Australia need to address the complexities both at national and international levels.
“Dragging Australia’s financial reporting regime into the 21st century”:
The Australian reporting standard is yet to adopt the significant reporting mechanisms, which are vastly utilised in different global exchanges. In Australia, the information pertaining to financial statements are provided to the users in a complex and detailed format, which could not be understood easily (The Conversation 2015). These reports are given in the pdf format electronically; however, the major problem is that the reports could not be downloaded electronically.
In addition, the statements are not easy to compare, which has hindered the prospects of the organisations to accumulate funds from the investors. Thus, the IFRS guidelines need to be implemented properly in the organisations for ensuring transparency and comparability in the financial statements.
“Why the numbers add up for direct cash flow statements”:
In Australia, the organisations report the information pertaining to direct cash inflows under Australian GAAP until 31st December 2004 under IFRS after 1st January 2005. This has made Australia a unique nation for determining the value relevance of the financial statements under different reporting standards (Clacher et al. 2016). . Therefore, data has been accumulated from 450 mining and industrial organisations of Australia, which are listed in ASX for the year 2000-2010. The different industries undertaken for the research include consumer goods, technology, telecommunications and healthcare.
It has been found that the information generated from the cash flow statements has been captured by the stock prices of both extractive and industrial organisations under Australian GAAP and IFRS. However, the information is more for the industrial organisations under IFRS. For instance, every $1 of cash under Australian GAAP represents 94 cents of the share price. On the other hand, every S1 of net cash under IFRS represents $6.17 of the stock price. The investors, therefore, have placed higher emphasis on the direct information pertaining to cash inflow under the IFRS framework.
In addition, the findings strongly support the compulsory introduction of the “direct cash flow statements”. Although, it might be argued that the cost issues and competitive disadvantage might be inherent under IFRS; however, the costs would be minimised along with ensuring competitive edge with thorough and detailed breakdown of items in the statement.
With the help of IFRS, the organisations would be able to ensure sustainability reporting, which would provide the investors with a valuable insight on the financial performance of the organisation. In this context, the investors would determine the course of action to be undertaken for investment purpose after reviewing at the market exposure of the firms.
“Companies warned about changes to the way commercial leases are accounted for on balance sheets”:
According to “IFRS 16 leases”, the new changes would affect the organisations, which prepare accounts like listed organisations, bigger private investments and management investments. The new change will focus on eradicating the operating lease concept. Instead, all the leases will be categorised as financial leases (Keating 2016). Due to this, majority of the leases would be realised as liabilities in the balance sheet statement of the firm.
The change will not be implemented before 1st January 2019. The potential ramifications could compel the small and medium-sized businesses in breach of loan covenants, since they could not lease their assets for renegotiation of loan agreements. This is because IFRS 16 leases could severely influence the calculations for gearing and interest coverage ratios. In addition, the nature of the expenditure realised in the income statement would change. This is because rent or leasing cost or rent could not be shown in the income statement. Instead, the expenditures could be shown as depreciation on the leased property or charge of interest on the liability of lease.
Conclusion:
Based on the above discussion, it could be inferred that IFRS has played a major role in improving the quality of financial disclosures and ensuring transparency in sustainability reporting of the global organisations. In addition, the investors are able to determine the market performance of the organisations by analysing their financial reports and stock market performance. From the Australian perspective, it has been evaluated that the comparison of financial statements has become relatively easier along with minimising the unethical accounting practices for ensuring sustainability reporting. However, certain improvements need to be made in IFRS, as the structure of financial statements is complex in nature to convey effective information to the investors.
References:
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Barbu, E.M., Dumontier, P, Feleag?, N, and Feleag?, L., 2014. Mandatory Environmental Disclosures by Companies Complying with IASs/IFRSs: The Cases of France, Germany, and the UK. The International Journal of Accounting, 49(2), p. 231.
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