Impact Of Adopting IAS 38 On International Accounting Standards

Background of AIS 38 Adoption

Question:

Discuss About The Outcomes As Well As Create Hidden Reserves?

As accounting is mostly moulded by political and economic aspects, synchronization of the accounting standards and principles is practically an unavoidable concern of increased incorporation of the policies and market (Ramanna & Sletten 2014). This is witnessed by the adoption of the AIS 38 in numerous countries across the globe. Amongst the largest nations in the world, it was only Japan, U.S, and India that had not adopted AIS 38 substantially joined with them. The AIS 38 adoption had noteworthy economic revolution and provided the risk to different research. With these considerations, this paper presents a detailed analysis of some of the impact of adopting IAS 38 across the globe. The purpose or objective of this report is analysis some of the foremost impacts of AIS 38 adoption in the world.

The AIS 38 adoption across the globe is a substantial financial renovation. The standard is said to have been founded from consequential amendments of the intangible assets disclosure from improvements to the AIS 16 (Zeghal & Mhedhbi 2006). In essence, the IAS 38 sets out recognition, criteria, disclosure requirements and measurement bases for the intangible assets that are not dealt with particularly in any other standard. To be more specific, the AIS 38 usually sketches accounting requests for the intangible assets, termed as non-financial assets short of any fleshly identifiable and substance (Lourenço, Branco & Castelo 2015).  Under these criteria, intangible assets are primarily evaluated at their cost value and amortized on the methodical basis over its valuable life. These measurement criteria were mainly revised in 2004 and were practically employed to measurement of the intangible assets that were attained in the business combination taking place on or after the March 8^th 2004 (Ramanna & Sletten 2009). Adoption of the AIS 38 is viewed as a relevant event with considerable effects in the world. Decisions to adopt the AIS 38 play a crucial role in international dissemination and acceptance of the AIS 38 (Chua & Taylor 2008). The primary objective of the AIS 38 was to help in prescribing accounting dealings for the intangible assets that were not handled predominantly in the other IFRS. This policy required an organization to recognize intangible assets provided that particular criteria were achieved. Also, the AIS 38 specifies on means of measuring carrying amount of the intangible assets and required appropriate disclosures of the intangible assets. (Judge, Li & Pinsker 2010).

Overview of AIS 38 Adoption across the Globe

It provides for the acquisition of intangible assets by an organization in numerous means with the main one being through distinct procurement, acquirement as part of the firm mixture and inside produced intangible assets (Zeghal & Mhedhbi 2006). According to this standard, all intangible assets are to be recognized formerly at cost plus the direct attribution charges and where there is a business combination, cost tends to correspond to fair value (Gordon & Porter 2009). The standard establishes that amortization criteria used are straight-line technique that reflects a speedier amortization of assets. Generally, according to the AIS 38, intangible assets are to be amortized by their useful life as from the time the assets are readily available for use (Rusu 2012).

Different scholars provide some evidence that effects of the AIS 38 or its equivalent adoption entail three key components; accounting harmonization, market efficiency as well as information presented in the financial statements (Sahut, Boulerne & Teulon 2011). The main impact of AIS 38 adoption was a considerably high increase in the credibility of AISB projects across the globe. Further, adoption of the AIS 38 is said to trigger significantly capacity of investors in making some cognizant financial decisions, reducing misperception that could arise from presence of diverse means to assess financial performance and status of numerous nations. This results in reduced risks for the investors as well as lower capital expense of the firm (Zeghal & Mhedhbi 2006).

Also, adoption of the AIS 38 would trigger reduced expenses linked with the preparation of the financial information in line with the set standards. Adoption of the AIS 38 could also result in greater incentives for the international investment and would also permit more efficient allocation of the financial resources across the globe (Chua & Taylor 2008). To be more specific, adoption of the AIS 38 make results more informative and permits better accounting and lessens pleasure that a traditional accounting systems are in existence in the Continental Europe as long as the management is in a position to manipulate provisions, conceal economic losses, embellish outcomes as well as create hidden reserves. In many countries, adoption of the AIS 38 is linked with significant paradigm shift (Georgescu & Afr?sinei 2015). For instance, its adoption is linked to augmented complication in accounting systems, which necessitates advanced level valuation as well as the greater commitment of the managers at numerous levels in an organization.

Impact of AIS 38 Adoption on the Global Economy

Adoption of the AIS 38 had some limited impact on financial reporting owing to significant non-compliance, the absence of improvement in the transparency of results and persistence of the national accounting standards as well as comparability measures. Nonetheless, it was established by Sahut, Boulerne and Teulon (2011) that mandatory adoption of the AIS 38 or its equivalent had some macro-economic benefits and some advantages for different capital markets across the globe. With the fact that AIS 38 or its equivalents result in increased comparability and quality of the financial statements, its adoption is said to result in improved investor’s capacity in making some informed financial decisions (Beneish, Miller & Yohn 2010).

Adoption of the AIS 38 also enables access to better information due to use of measurement and recognition criteria that better show economic reality of the firms. In essence, it is stated that adoption of the AIS 38 or its equivalents improves the functionality of the global capital market by giving high-quality and comparable information to different investors (Ball 2016). Further, adoption of the AIS 38 is viewed to have some positive impact on the information utilization, to the extent that accounting information that is prepared following the AIS 38. Also, its equivalents are viewed as having relatively advanced superiority, and therefore it is regularly utilized in paying administrative and in investment decision-making (Zeghal & Mhedhbi 2006).

The AIS 38 has changed ways on how intangible assets were measured, treated and recognized. In essence, it derecognizes anything that has been internally generated and write down previously re-valued intangible assets to the historical costs since an organization is unable to retain the evaluation unless there are some secondary markets (Alsuhaibani 2012). This means that AIS 38 would have some important impacts on financial statements of those firms that are forced to derecognize particular intangible assets. Another impact of adoption of the AIS 38 is an increase in some firms having some issues in attaining their current debt covenants, and thus such firms end up adjusting their financial reports with the aim of meeting their bank’s debts covenant needs (Márquez-Ramos 2008). The standards also affect a number of the total assets reported or disclosed in the financial statements.

Conclusion

In conclusion, the AIS 38 usually sketches accounting requests for the intangible assets, termed as non-financial assets short of any fleshly identifiable and substance. It is evident that the standard establishes that amortization criteria used are straight-line technique that reflects a speedier amortization of assets and intangible assets are to be amortized by their useful life as from the time the assets are readily available for use. Under these criteria, intangible assets are primarily evaluated at their cost value and amortized on the methodical basis over its valuable life. Furthermore, it can be concluded that the decisions to adopt the AIS 38 played a crucial role in international dissemination and acceptance of the AIS 38. This is based on the notion that the standard help in prescribing accounting dealings for the intangible assets that were not handled predominantly in the other IFRS. Also, the AIS 38 specifies on means of measuring carrying amount of the intangible assets and required appropriate disclosures of the intangible assets. It can also be concluded that adoption of the AIS 38 triggers significantly capacity of investors in making some cognizant financial decisions, reducing misperception that could arise from diverse means to assess financial performance and status of numerous nations. This in turn results in reduced risks for the investors as well as lower capital expenditures of the firm. To be more specific, adoption of the AIS 38 make results more informative and permits better accounting and lessens pleasure that a traditional accounting systems are in existence in the Continental Europe as long as the management is in a position to manipulate provisions, conceal economic losses, embellish outcomes as well as create hidden reserves. With the fact that AIS 38 or its equivalents result in increased comparability and quality of the financial statements, it can also be concluded that adoption of AIS 38 result in improved investor’s capacity in making some informed financial decisions, practical allocation of the financial resources as well as improved funding or investment conditions worldwide.

References

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