Regulatory Environment And Accounting Standards For Australian Corporate Accounting And Reporting

Part A

Materiality has great importance in the context of accounting. The concept of materiality in accounting can be explained or discussed in various manner. Any such principle in accounting, which states that every significant or crucial matters or items of the organization or of the financial statements are to be disclosed to the user of such information and the unimportant matters can be ignored, is simply according to the concept of Materiality in accounting (Warren and Jones 2018). On the other hand, the materiality concept is such a concept that allows an accountant or the user of the data or information to violate any other principle of accounting under such circumstances where the amount is so minor that it will not mislead the reader of the financial report. Thus from the above definition or description of Materiality it is quite clear that the errors in materiality can always mislead the investors or decision makers. According to the US GAAP, such items can be considered as material if it has the potential to influence the decision of the user that is related to his economic condition or situation (Bushman 2014). The materiality concept varies from firms to firm or from one company or organization to another. An amount or item of $100 may not be material for a firm or company that have a very high turnover or which operates in large scale. However, at the same time this figure of $100 may be of material importance to such firm which have very small turnover or which operates in small scale and makes minor profits.

After analysing the concept of materiality, it can be observed that there is no distinct definition or perfect meaning of materiality is given. As it is seen in the above analysis, that materiality differs from one firm to another depending upon its revenue and scale of operation. Moreover, it is not properly mentioned under the materiality concept that specifically which financial or accounting information are to be regarded as material (Henderson et al. 2015). Due to this reason various financial information, which holds immense importance, are not disclosed in the statement of financial position. Thus, it is said that this concept of materiality is reducing the clarity and understanding of financial statements as very often the users of these statements are deprived of certain material information to which they are entitled.

The concept of materiality has a very crucial role to play when it comes to the International Integrated Reporting Framework. Through the concept of materiality, the determination of matters that are to be included in the IR and hence ensuring conciseness can be achieved. The matters or elements where materiality is extremely essential includes the following:

Answer to question i

Through materiality:

• Identifications of important matters that are required to be included in the Integrated Report can be considered. This includes drivers for the values, issues of several stake or shareholders, internal and external factors, ability of the organization to create values and company’s present performances (Pratt 2016).
• The importance and essentiality of the matters can also be assessed which are based on the effect’s magnitude and probability of event.
• Materiality is also known for prioritising matter that are material according to their importance and effectiveness.
• Materiality also emphasises to disclose several information that are useful for the investors or other users of financial statements. These includes, the process of materiality, staffs who are indulges in such process, the governance body, definition and discussion regarding matters that are material, the performance and goals of the business or company, uncertainties and control levels over matters that are material  and suggestions for the company (Beatty and Liao 2014).

Initially, in the year 1992, the International Accounting Standard Committee introduced or issued the IAS 7 – Statement of Cash Flows replacing the IAS 7 – Statement of Changes in Financial Position. Since then, the statement was amended several times. There are various issues which are faced by the managers or management regarding the in preparing the cash flows statement (Macve 2015). Among them, manipulation of information in the cash flow statement is one of the most serious issue faced by every organization or management. In this regards it can be said that in order to increase the net cash flows, the management of the organization may opt for making payment to its suppliers lately. Moreover, in order to avoid in payment of cash, the management may also decides to acquire good based on leasing. Thus in order to solve out several issues associated with the IAS 7, recently an amendment has been made to it. The main aim behind implementing changes in IAS 7 is to develop the potential of the statement so that the user of the financial statements are offered with more clarity and information regarding the financial status of the company. Firstly, in the amendments it is clearly mentioned that every organizations are required to provide disclosures that will assist the user of the financial statements or information in estimating the difference in the amount of liability which arises out of its financing activities (Chan et al. 2016). Therefore, for the organization to achieve this objective, the IASB must ensure the following amendments are to be carried out with respect to the liabilities that rises from the company’s financial activities:

• Changes that rises out from obtaining or losing control of other or subsidiary businesses.
• Changes arising from financial cash flows
• The impact which are created by the changing rates of foreign exchanges
• Changes for values and other changes.

It is also stated in the amendment that by offering a reconciliation between the closing and the opening balances for those of the liabilities that arises out from financial activities in the financial statement the requirements of the new disclosures can be fulfilled.

Apart from this, it is also considered as a major disclosure that every company must mandatorily separate the changes in liabilities arising out from financing activities from that of the changes that takes place in other liabilities and assets of the company.

International Financial Reporting Standards has introduced significant changes that were not required by individual national GAAPs. These changes in the IFRS require the companies to undertake major changes in the way of their reporting. For example, reporting on financial instruments and shared based payment were for the first time reported in the financial statements of the companies due to IFRS requirements or guidelines (Warren 2016). This results in preparation of more complex financial statements under IFRS as compared to national GAAPs. The complexity that is encountered while preparing the books of accounts in accordance with the IFRS is due to the complex nature of rules that lay down the guidelines for recognition and measurement of transaction and also the increased number of disclosures required to be given. Though the purpose of IFRS is to bring uniformity and thereby comparability among the financial statements prepared by different companies, due to its complexity it often causes problem for the users of financial statements in understanding them, resulting in inconsistencies in understanding the financial statements by the users (Barth 2015).

Answer to question ii

Within the IFRS the way in which financial statements will be made and the way they should be presented is contained IAS 1 i.e. Presentation of Financial Statements. The standard suggests the different ways that can be used in presenting and forming the financial statements. There are also additional information that a country’s legislation makes compulsory to be disclosed in the financial statements. Therefore, a uniform and optimal form and way of presentation is yet to evolve internationally. As a result, every organisation making a transition to IFRS does it in a way that entails minimal changes to be made in the way of reporting done previously under national GAAP. For e.g. the companies of U.K. have adopted the practice of recording incomes and expense in a separate statement and changes in equity in a separate statement whereas the companies in France have adopted the practice of making single statement of changes in equity (Lovell 2014).

There also remains the possibility of interpreting the standards in different ways by the companies due to the absence of clarity or guidance in some of the accounting standards. For instance there are different methods of recording of assets as prescribed by IAS 39 “Financial Instruments: Recognition and measurement” in the books of accounts i.e. their net realisable value or fair value.

The standards prescribed in the IFRS are not based upon principles that are consistent. There are also conceptual inconsistencies present within as well as between the standards. Certain standards allow the makers of financial statements the use of alternative accounting treatments and this further adds to the sources of inconsistencies among financial statements. For e.g. IAS31 dealing with “Interests in joint venture” allows the companies controlled jointly can record their interest using the proportionate method or equity method. (Callen 2015). The companies may opt for the accounting practice they have been employing according to the national GAAP. Another e.g. where alternated method of accounting has been given is IAS 16 ‘plant property and e equipment’. The companies have been given option either to value their asset using the cost model or the revaluation model. Also there is very limited information regarding matters related to the industry discussed in IFRS. As a result the selection of accounting policies is greatly significantly influenced by the judgements of the management. This has resulted in a degree of inconsistencies and incomparability among the financial statements of the companies.

Answer to question iii

Another instance where different accounting treatment can be adopted by different organisation is of IFRS 1 in which the IFRS allows the companies to enjoy many exemptions from the requirements of the IFRS. The exemptions availed by the organisations can affect them for years. For e.g. the companies may opt for recognising all the cumulative actuarial losses and gains with respect to post-employment benefits but, later on decide to choose the corridor approach. Hence the companies can opt for one time write off all its actuarial losses thereby influencing the financial statements significantly and affecting its comparability. Further the company after they have taken the above exemption can make use of other comprehensive income to record their profits and losses in the period they occurred and refrain from using the corridor approach. This leads to additional damage to the comparability.

IAS 18 ‘Revenues’ allow recognition of revenue in alternate ways. There has been no specific guideline laid down in the standard regarding the arrangements with multiple deliverables. The standard only says that the transactions should be viewed in respect of their actual substance than form. But, apart from this there are no clarifications given in the standard. The process of identification of functional currency under IAS21 is also very subjective. Because the functional currency of an organisation can be determined by either the currency in which the commodity produced by the company is being sold or purchased in the market or the currency that significantly impacts its  cost of daily operations , and it is not necessary that they would be same . This can also lead to inconsistencies.

The application of the IFRS system of reporting of financial transaction, management’s judgement can have greater impact than that was under the national GAAP. The IFRS uses fair value very extensively. While the management is computing or considering issues like payments based on shares, retirement pensions, assets which are intangible being acquired in business acquisitions and the amount by which the assets have been impaired, the management has to use its own judgements and assumptions in selecting valuation methods and formulating assumptions (Gumb et al. 2017). These differences in the methods of assumption have a significant influence on the amount that has been recorded in the financial statements. IAS1 states that it is expected that the company will disclose the methods, estimates and assumptions underpinning the carrying amounts if there is considerable risk that the amount at which they are recorded in the books within the upcoming financial year. Mostly the decision that comes from the management is that there is no significant risk of material adjustment within the next financial year. Going by these assumptions they are incapable in disclosing the level of uncertainty and assumption thereby affecting the comparability.

Answer to question iv

In addition to the presence of IFRSs an efficient financial reporting framework is necessary. The infrastructure should include corporate governance rules that are effective,  auditing methods of high quality, and an efficient oversight mechanism. Therefore we must understand that the consistency and comparability of financial statements in addition to the IFRSs will also depend on the presence of robust accounting framework within the organisation (Lovell 2014).    

It may also happen many persons involved with preparation of financial statements are versed with the provisions of GAAP but, not of IFRS. This will further affect the comparability. Also in cases when the legislation framing laws and bylaws of the market of a country is not effective and efficient there may be lack of appropriate market information to make use of fair value as a way of measurement, this may lead to creation of imaginary markets or use mathematical models which will again add to the problem of differentiation due to the inexperience of the country using these methods.

The change made from the GAAP to IFRS is definitely beneficial in the long run adding consistency and comparability in the reporting framework all around the world.  However there are still significant number of issues present relating to the transition which may hamper the consistency and comparability of financial statements.

Reference

Barth, M.E., 2015. Financial accounting research, practice, and financial accountability. Abacus, 51(4), pp.499-510.

Beatty, A. and Liao, S., 2014. Financial accounting in the banking industry: A review of the empirical literature. Journal of Accounting and Economics, 58(2), pp.339-383.

Bushman, R.M., 2014. Thoughts on financial accounting and the banking industry. Journal of Accounting and Economics, 58(2), pp.384-395.

Callen, J.L., 2015. A selective critical review of financial accounting research. Critical Perspectives on Accounting, 26, pp.157-167.

Chan, S.H., Song, Q., Rivera, L.H. and Trongmateerut, P., 2016. Using an educational computer program to enhance student performance in financial accounting. Journal of Accounting Education, 36, pp.43-64.

Gumb, B., Dupuy, P., Baker, C.R. and BLUM, V., 2017. The impact of accounting standards on hedging decisions. Accounting, Auditing & Accountability Journal, (just-accepted), pp.00-00.

Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU.

Lovell, H., 2014. Climate change, markets and standards: the case of financial accounting. Economy and Society, 43(2), pp.260-284.

Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, Or Threat?. Routledge.

Pratt, J., 2016. Financial accounting in an economic context. John Wiley & Sons.

Warren, C.M., 2016. The impact of International Accounting Standards Board (IASB)/International Financial Reporting Standard 16 (IFRS 16). Property Management, 34(3).

Warren, C.S. and Jones, J., 2018. Corporate financial accounting. Cengage Learning.