Discuss about the Financial Accounting Developments for Public Sector Accounting.
The news article that has been chosen for the review for identifying the accounting developments at present is titled “The journey to international accounting standards” by James Gallaway. The news has been published in Australian journal “INTHEBLACK”. The study deals with the memorandum of understanding between the World Bank and the IFRS Foundation. According to the article it is yet another step on a journey towards the global harmonization of financial reporting standards (Berger, 2018). The article states that having a single set of high-quality, global accounting standards makes the flow of trade and capital stronger and more transparent.
As the economies of the world has dramatically changed and innovated in the past 25 years, it has been pointed out that in the range of the years of 2010–2016, the seven largest so-called emerging economies – Brazil, China, India, Indonesia, Mexico, Russia and Turkey – contributed 24 per cent of global economic output, up from 14 per cent as calculated in the 1990s. In the same time as per the World Bank data the Group of 7 (G7) industrialised economies shrank from 60 per cent of world economic output to 48 per cent. The article identifies the issue and the pros and cons behind it.
James Gallawayin the journal has identified that while maintaining the significant increases in trade and capital from emerging economies, and improving poverty in the nations as a result, is a major aim of the World Bank, and it sees the accounting framework developed by the International Financial Reporting Standards (IFRS) Foundation as playing an important role in its program (Vigneau, Humphreys& Moon, 2015).
According to the IFRS Foundation,more than one-third of all financial transactions occur across national borders. Having a single set of high-quality, global accounting standards makes the flow of trade and capital stronger and more transparent. Therefore, it can be said that the World Bank holds that adopting IFRS can attract investment and boost development in emerging economies.
The IFRS Foundation and the World Bank signed a memorandum of understanding on May 2017, in order to develop education programs and materials to support the implementation of IFRS in developing economies (Edogbanya&Kamardin, 2014). This would also encourage the developing economies to play a bigger role in the work of the foundation to set accounting standards. Michel Prada,has also said in this regard that there has been a large number of developing economies adopt IFRS that has been identified. However, many of these countries need additional support when adopting the standards or implementing major changes to the standards.
The Articlefurther focuses on the others in the foundation that includes the trustee Wiseman Nkuhlu, chancellor of the University of Pretoria and chairman of Rothschild (SA), says the Memorandum of understanding is a major development for emerging markets and developing economies (Cheng, et al., 2014). They also says that dependency on aid has moved to market participation and growth in the private sector, and it’s very important that accounting standards are in line with international standards
CPA Australia’s policy adviserRam Subramanian in the context of reporting, policy and corporate affairs, sees the Memorandum of understanding as part of the journey, he identifies the memorandum of understanding as theright step as emerging economies continue to work towards greater implementation of IFRS through establishing training mechanisms, education and a greater focus on specific challenges such as fair value. The practical application of IFRS in the emerging economies and the challenges that are faced by the fair value measurement become clear.
The article also argues that along with the difficulties in measuring fair value in emerging economies that relate to aspects particular to those economies there exists nuances in the local language that can throw up challenges in translation, particularly when there is consideration about the use of terms involving judgement such as high certainty and high probability (Hayes, Wallage&Gortemaker, 2014). In order to protect their vulnerable budding capital markets, emerging economies also tend to be more tightly regulated. This can produce an environment not completely driven by market forces, as added bySubramanian.The IFRS Foundation recognised during its discussions in 2011 that states that the market operations of emerging economies are still developing, and there are often many regulatory restrictions in the areas of market access, operation and exit mechanisms.
The article then gives the example of Malaysia who has the right ingredients needed to become a developed nation. As one of South-East Asia’s big exporters of integrated circuits, palm oil and petroleum, its GDP growth is forecast to average below 5 per cent to 2018, and its economy is relatively open (Bovens, 2014). The Malaysian Financial Reporting Standardsfollows by heart the IFRS. It is the culmination of the harmonisation of accounting over time, which gathered pace when the Malaysian Accounting Standards Board (MASB) was set up in 1997.
The MASB’s executive director,Tan Bee Leng refers the issues raised at the EEG meeting six years ago that were particularly relevant to Malaysia included the fair value measurement of bearer biological assets.
A similar issue was raised in this article in relation to property construction. Here, there was disagreement over whether revenue was recognised at a point. There had significant debates on this question as said by Bee Lengthe Malaysian Institute of Accountants has addressed the issue as ‘progressively’ for residential properties.
While discussing about the accounting practices in the other regions it can be said that the emerging economies in usual have a relatively small number of professional values and accountants, the Emerging Economies Group found in 2011. This lack of accountants has a flow-on effect (Simnett& Huggins, 2015).As said by the group report the costs involved for the determination of fair values and preparing financial statements thatcould be more than that in developed countries, particularly if countries do not have many qualified personnel to carry out the required valuations. For instance the population of Africa is about 10 times that of the United Kingdom, but it has fewer accountants.
The highlighted challenge does not appear to be hampering the adoption of IFRS in south-east Asia. However, the World Bank Report on the Observance of Standards and Codes for developing economies in South-East Asia reveals that, as far as it relates to IFRS adoption in Vietnam, much of the focus of the memorandum is already in place (Boje, 2015). Vietnam is working with accounting standards based on the 1999 to 2004 versions of IFRS, with plans to move to the current IFRS by 2020. Also in Philippines, where the country’s Generally Accepted Accounting Principles adopted IFRS to a substantial degree in 2004 and 2005, the only remaining questions are about supporting the accessibility of standards with training materials, and researching the use and impact of standards.
Conclusion
The IASB wants feedback on what needs to be done in the provision of educational resources and training, as well as enforcement in legislation and through statutory authorities.
Where the things are moving rapidly the IFRS are working with both the government and stakeholders to get them ready for implementation worldwide. The memorandum of understanding is just another stage in the development of the ongoing process.
The main aim of this part is to do the assessment of one of the exposure drafts for a new accounting standard that will help in increasing the quality of financial reporting. For this purpose, IFRS 16 Leases is taken into consideration. The International Accounting Standard Board (IASB) has introduced IFRS 16 Leases in 16 January 2016 in order to replace IAS 17 Leases (assets.publishing.service.gov.uk, 2018). The main aim behind the introduction of this regulation is to bring transoerecny in the process of lease accounting in the companies. According to IFRS 16 Leases, the biggest change or amendment by this standard is the obligation on the business organizations to shows their leases in their balance sheet so that the visibility of the assets and liabilities can be increased. Apart from this, the application of IFRS 16 Leases will result in the removal of the classification of leases as either finance leases or operating leases as the companies will be required to treat all of their leases as the finance lease (assets.publishing.service.gov.uk, 2018).
One of the major notable aspect of the introduction of IFRS 16 Leases is that it will remove the similarities in the accounting models for the lessor and lessee. The distinction of operating and finance leases will be there for the lessors, but there will not be any distinction between the operating and finance leases for the lessees. Another major amendment is that the short-term leases as well as the low-value assets are exempt from the requirements (efrag.org, 2018). For the lessees, IFRS 16 Leases has introduced a single that will be majorly helpful for the lessees for the recognition of the lease assets and liabilities. At the same time, the requirement for the lessors is to recognize a right-of-use asset as a lease liability that will represent the lease obligation. These are the major amendments or changes in IFRS 16 Leases (assets.publishing.service.gov.uk, 2018).
It needs to be mentioned that the main intention behind the introduction of any regulation is to do the betterment of the public or common people. On a more specific note, regulations should be introduced as per the public interest. In this context, it need to be mentioned that both the business organizations and users of the financial statements will be majorly beneficial from the introduction of the standard of IFRS 16 Leases (Christian & Lüdenbach, 2013). First of all, the introduction of this standard will lead to more faithful representation of the assets and liabilities of the business organizations. For this reason, the users of the financial statements or the public will be able to judge the financial position of the business entities. More importantly, the introduction of this regulation will be majorly helpful in increasing the transparency of the financial statements so that the public or the users can judge the financial performance of the entities by obtaining correct financial information about the assets and liabilities (Morales-Díaz & Zamora-Ramírez, 2017).
Apart from these, in the presence of IFRS 16 Leases, the users of the financial statements will be able in the comparison between lease assets and liabilities of more than one company. In the presence of all these aspects, the credit rating agencies and others will not need to make adjustments that will be majorly helpful for the users and the public. Thus, from the above discussion, it can be seen that the introduction of IFRS 16 Leases will ensures that the public are majorly beneficial from this. For this reason, it can be said that the exposure draft is being introduced for the public interest (Christian & Lüdenbach, 2013).
It can be observed that different parties have provided their opinions both for and against the introduction of IFRS 16 Leases. Four of these major parties are the users, user organizations, preparers and leasing associations. All of these groups have both agreement and disagreement with the exposure draft of IFRS 16 Leases. The following discussion highlights both the areas of agreements and disagreements.
Agreements: According to some of the respondents, they have agreed on the fact that the introduction of IFRS 16 Leases will increase the transparency of the financial statements that will be majorly helpful in making effective investments decisions by the investors. Another major area of agreement is that IFRS 16 Leases will increase the protection of both the investors and the market and it will also increase the comparability of assets across the companies (efrag.org, 2018).
Disagreements: One of the major areas of disagreement is the increased cost of the adoption of the regulations of IFRS 16 Leases. Apart from this, one part of the respondents has disagreed with the benefits of IFRS 16 Leases by stating the fact that it will increase the complexity of the lease accounting of the companies. Another major area of disagreement is on the fact that the right-of-use model of IFRS 16 Leases fails in the depiction of the business model of the companies. One group of the respondents from the leasing association has disagreement on the implementation of IFRS 16 Leases and they think that the modification on the requirements on the substitution rights will be majorly restrictive (efrag.org, 2018).
Thus from the above discussion, it can be seen that the introduction of IFRS 16 Leases has major agreements and disagreements from the respondents of the letters.
It needs to be mentioned that IASB has utilized some of the major agreements and disagreements of IFRS 16 Leases in order to improve the standard. It can be observed that IASB has taken into consideration all the major agreements and disagreements so that they can be used for bringing improvement in the regulation (efrag.org, 2018). For this reason, IASB has revised the assessment cost of the lessor so that they have to bear less cost at the time of the implementation of IFRS 16 Leases. Some of the respondents have expressed their concern about the timeliness of the implementation of IFRS 16 Leases. For this reason, IASB is considering to increase the time of the implementation of the regulation of IFRS 16 Leases (efrag.org, 2018).
Public Interest Theory: Public interest theory is a major economic concept that provides theoretical justification for the regulation. The principle of this theory states that the introduction of regulation is the result of the public demand. For this reason, the regulations have a major role to play in the promotion of the interest of the public. Based on this theory, it can be said that the main reason behind the introduction of IFRS 16 Leases is the demand for public to get correct information about the assets and liabilities of the company (Koopman, Mitchell & Thierer, 2014).
Private Interest Theory: The principle of public interest theory is similar to the public interest theory and it states that the individuals seek to act in their own interest. This theory is based on the assumption that there will be formation of group in order to protect their own interest. For this reason, private groups use to lobby the regulations for the adoption or rejection of a particular rule (Mansbridge, 2018).
Capture Theory: The principle of capture theory states the fact that the regulators do manipulation with the regulations in order to satisfy their own interest. Thus, after a certain period, the regulations services in the interests of the regulators (Portman, 2014).
The earlier discussion indicates towards the fact the introduction of IFRS 16 Leases has major benefits for the interests group that is the public. For this reason, the public interest theory is most effective; and private interest theory and capture theory are least effective in this situation.
Reference
Berger, T. M. M. (2018). Ipsas Explained: A Summary of Standards and Principles of International Public Sector Accounting Standards. John Wiley & Sons.
Boje, D. M. (Ed.). (2015). Organizational change and global standardization: Solutions to standards and norms overwhelming organizations. Routledge.
Bovens, M. (2014). Two Concepts of Accountability: Accountability as a Virtue and as a Mechanism. In Accountability and European Governance (pp. 28-49). Routledge.
Cheng, M., Green, W., Conradie, P., Konishi, N., &Romi, A. (2014). The international integrated reporting framework: key issues and future research opportunities. Journal of International Financial Management & Accounting, 25(1), 90-119.
Christian, D., & Lüdenbach, N. (2013). IFRS essentials. John Wiley & Sons.
Dumay, J., Bernardi, C., Guthrie, J., & La Torre, M. (2017). Barriers to implementing the International Integrated Reporting Framework: A contemporary academic perspective. Meditari Accountancy Research, 25(4), 461-480.
Edogbanya, A., &Kamardin, H. (2014). Adoption of international financial reporting standards in Nigeria: concepts and issues. Journal of Advance Management Science, 2.
Hayes, R., Wallage, P., &Gortemaker, H. (2014). Principles of auditing: an introduction to international standards on auditing. Pearson Higher Ed.
IFRS 16 Leases Summary of Comment Letters received in response to EFRAG’s consultations. (2018). Retrieved from https://www.efrag.org/Assets/Download?assetUrl=%2Fsites%2Fwebpublishing%2FMeeting%20Documents%2F1606211124385546%2F09-02%20Analysis%20of%20feedback%20received%20from%20the%20consultations%20-%20For%20background%20-%20EFRAG%20Board%2017-01-12.pdf&AspxAutoDetectCookieSupport=1
IFRS 16 Leases: Exposure Draft. (2018). Retrieved from https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/705835/IFRS_16_Exposure_Draft.pdf
Koopman, C., Mitchell, M., & Thierer, A. (2014). The sharing economy and consumer protection regulation: The case for policy change. J. Bus. Entrepreneurship & L., 8, 529.
Mansbridge, J. J. (2018). A deliberative theory of interest representation. In The politics of interests (pp. 32-57). Routledge.
Morales-Díaz, J., & Zamora-Ramírez, C. (2017). Effects of IFRS 16 on Key Financial Ratios: A New Methological Approach.
Portman, M. E. (2014). Regulatory capture by default: Offshore exploratory drilling for oil and gas. Energy Policy, 65, 37-47.
Simnett, R., & Huggins, A. L. (2015). Integrated reporting and assurance: where can research add value?. Sustainability Accounting, Management and Policy Journal, 6(1), 29-53.
Smith, S. R., & Smith, K. R. (2014). The journey from historical cost accounting to fair value accounting: The case of acquisition costs. Journal of Business and Accounting, 7(1), 3.
Vigneau, L., Humphreys, M., & Moon, J. (2015). How do firms comply with international sustainability standards? Processes and consequences of adopting the global reporting initiative. Journal of Business Ethics, 131(2), 469-486.
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