The Effect Of IFRS Adoption On The Financial Reports Of Local Government Entities

IFRS Adoption Impact on Equities, Surpluses, Assets and Liabilities

This report is based on published journal article titled “The Effect of IFRS Adoption on the Financial Reports of Local Government Entities” written by Kamran Ahmed and Manzurul Alam. This article has detailed out the Impact of adoption of IFRS on the financial accounting process of Australian companies. Main focus of this article is on changes in accounting valuation and estimation that have occurred in the process of adoption of International Financial reporting standards which has replaced previous Australian Accounting Standards. This change was done to harmonize the accounting and reporting framework used by Australian companies with that of accounting reporting of companies in international market.

This report is focused on the impact that adoption of IFRS has put on equities, surpluses, assets and liabilities of local government entities working in Australia. The implementation of IFRS model is sector neutral that means that this framework is applicable on all business sector including local government entities and non-profit organizations. Prior to implementation of IFRS, the accounting of government sector companies were governed and based on three major Australian Accounting Standards i.e. AAS 27, AAS 29 and AAS31(Zeghal & Lahmar¸2016).

With introduction of IFRS the accounting standards for all organization have become same for each and every sector. In initial years of its implementation, local government organizations were required to maintain their books of accounts and financial statements according to both IFRS and Three Australian accounting standards mentioned above. As main purpose of this paper it to analyze the effect of financial accounting framework on profitability and other aspects of business in an operational organization. Analysis of financial statement of local government entities before and after implementation of IFRS would be ideal as they have prepared financial statements for year ending 2005 with both these methods (Tran & Zhu, 2017).

For effective analysis, this research paper has collected data from all the local departments of New South Wales (NSW), Queensland (QLD), South Australia (SA) and Victoria (VIC). Sample data collected from different departments is as follows-

	N Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	Percentage of total	New South Wales	Queensland	South Australia	Victoria
City council	61	52%	18	6	12	25
Shire Council	50	43%	15	4	8	23
District Council	6	5%	6	0	0	0
Total	117	100%	39	10	20	48

The researcher have prepared a reconciliation statement that shows the difference in equities, surpluses, assets and liabilities with the financial statement prepared with IFRS and applicable ASA on such local government (Clarkson, Hanna and Richardson, 2011).

Main items in financial statements that has shown difference in surplus are interest earned from council, retained earnings, accumulated profits and errors carried from last financial year. Mean median and standard deviations are calculated to evaluate this impact. Previous to the implementation of IFRS, it was argued that smaller business organizations working in Australia would be at higher disadvantage as they have lower resources and there were very few experts of IFRS at that time. To evaluate the accuracy of this argument research was conducted on 135 small size firms by Goodwin and Ahmed in 2006. This research showed that more than 50% of these firms did not have any impact on their net profit or loss. In opposition to the initial review, this research indicated that the profits of these small and medium size companies has increased after adoption of IFRS as their accounting frame work (Ahmed and Alam, 2012).

Research Methodology

It can be said that changing accounting framework to IFRS has been an effective and huge change in Australian accounting system. There have been various debated whether it should be implemented or not. This research has concluded that there have been various differences in surplus, assets, liabilities and reserves between the accounting framework of IFRS and AASB. Major changes that can be evaluated in the mentioned research are depreciation, amortized expenses, employee benefits; indirect revenue, interest expenses in relation to borrowings, PPE loss and gain, and materials. On conducting an overall analysis it can be said that in majority of local departments, surplus has decreased but there have been significant increase in equity of these departments. This is the situation of small local government departments but in case of large departments, there has been an increase in both equity and surplus (Jeanjean & Stolowy, 2008).

One of the biggest limitation of this research is that it is limited to government entities. This research cannot be considered as a conclusion study and there is a requirement of conducting and studying other studies to evaluate true impact of adopting IFRS on organizations working in Australia.

This research has explained that there are no significant impact on overall valuation and profitability of the companies in government sectors due to introduction of IFRS in Australian accounting framework. The case would be same in other industries and nature of business as the standards of IFRS do not change with the change in nature and size of business (Wang & Welker, 2011). In long run this is an advantageous step for businesses as they have adopted a universal accounting framework. The valuation of business could be done in better manner and comparison can be made with other organization with ease as all businesses will follow similar accounting framework (Cotter, Tarca & Wee, 2012).

There have been various studies on this matter and there have been different conclusion of these reports. Some of the researchers believe that there have been positive impact of adoption of IFRS on business organizations in Australia as less companies are not engaging in earning management after such adoption (Horton, Serafeim & Serafeim, 2013). Earning management was an accounting manipulation phenomenon that was used by management of company to change their accounting representation in such as was that profits of the company are deceitfully increased to attract more and more investors in the company. Use of this accounting manipulation technique has decreased after adoption of IFRS. These are very low scope of loopholes in accounting principles of IFRS that gives very less room for accounting manipulation. In addition to that researchers have also identified that this change in accounting framework has also improved the quality of reporting and accounting frameworks (Bryce, Ali & Mather, 2015).  

Impact of IFRS Adoption on Smaller Businesses

There are some researchers that do not agree with the above findings as they think that quality of accounting representation has remained the same. On the other hand they are of the opinion that this change has increased the complexity in the process of accounting and reporting. According to them, Pre IFRS accounting treatment of certain accounting items were better as compares to accounting treatment given by IFRS such as “Accounting for identifiable tangible assets”.

A research conducted by Australian Accounting Standard Board” has stated that process of accounting transition from pre-IFRS period and Post IFRS period has been very smooth and effective. IFRS standards were modified by the AASB to help management of companies in easy implementation in early implementation years (Ahmed, Chalmers & Khlif, 2013). Business organizations have found various advantages of this new accounting framework that would help them in growth and development. For example, due to adoption of harmonized accounting framework companies working in multiple sectors can move in different sectors without any major changes in accounting policies. Possibly one of the biggest advantage of this change would be that multinational companies will be more open for investment in Australian companies as their accounting frameworks is same as framework adopted by companies in rest of the world.

References 

Ahmed, K. and Alam, M., 2012. The effect of IFRS adoption on the financial reports of local government entities. Australasian Accounting, Business and Finance Journal, 6(3), pp.109-120.

Ahmed, K., Chalmers, K., & Khlif, H. (2013). A meta-analysis of IFRS adoption effects. The International Journal of Accounting, 48(2), 173-217.

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.

Clarkson, P., Hanna, J. D., Richardson, G. D., & Thompson, R. (2011). The impact of IFRS adoption on the value relevance of book value and earnings. Journal of Contemporary Accounting & Economics, 7(1), 1-17.

Cotter, J., Tarca, A., & Wee, M. (2012). IFRS adoption and analysts’ earnings forecasts: Australian evidence. Accounting & Finance, 52(2), 395-419.

Horton, J., Serafeim, G., & Serafeim, I. (2013). Does mandatory IFRS adoption improve the information environment. Contemporary accounting research, 30(1), 388-423.

Jeanjean, T., & Stolowy, H. (2008). Do accounting standards matter? An exploratory analysis of earnings management before and after IFRS adoption. Journal of accounting and public policy, 27(6), 480-494.

Tran, A., & Zhu, Y. H. (2017). The impact of adopting IFRS on corporate ETR and book-tax income gap. In Australian Tax Forum (Vol. 32, No. 4, p. 757). Tax Institute.

Wang, S., & Welker, M. (2011). Timing equity issuance in response to information asymmetry arising from IFRS adoption in Australia and Europe. Journal of Accounting Research, 49(1), 257-307.

Zeghal, D., & Lahmar, Z. (2016). The Impact of IFRS Adoption on Accounting Conservatism in the European Union. International Journal of Accounting and Financial Reporting, 6(1), 127-160.