Challenges in Adopting IFRS in Australia

Write an essay on “Challenges in Adopting IFRS in Australia”.

Introduction

Accounting is the mechanism of recording, categorizing and analyzing transactions to demonstrate true reflection of financial outcomes of operations within a particular period.  It allows creating records and communicating financial information in a systematic manner, thereby ascertaining surpluses or deficits, evaluating the financial performance and presenting of information to all the related and interested parties. The authorized standards are followed to recognize, evaluate, display and disclose financial aspects. A proper standard assists to present the financial information in such a manner that it allows interesting parties to make decisions (Henderson et al., 2014). International Financial Reporting Standards (IFRS) is one of the standard prescribed reporting frameworks, which determines the manner of reporting in financial statement of business (Pacter, 2015).    

This essay aims to gain understanding about IFRS and analyzes the challenges related to adoption of IFRS in the context of Australia.       

Understanding of IFRS Adoption Issue

IFRS was developed to improve the standards, comparability, accuracy and transparency of financial statements for a company within a particular period. If thoroughly and consistently the prescribed standards of IFRS are applied, then the interesting parties have access to quality information and thereby improve decision-making (Ankarath et al., 2010). IFRS was introduced in 1973, which was recognized as International Accounting Standard (IAS) and incorporated by International Accounting Standards Committee (IASC). The standard was developed to create better understanding about companies’ financial statement. In the year 2001, International Accounting Standard Board (IASB) replaced governing authority IASC. IASB took initiative of developing more transparency in the accounting standard and established IFRS. In the recent years, various nations within EU, South Korea and Australia among others either adopted or agreed to IFRS utilization. The US also accepted IFRS by leaving US GAAP, which was in use from years (Zakari, 2014). Various previously conducted studies reflected difficulties in adoption of IFRS. For instance, Madawaki (2012) highlighted legal framework, requirement of raising awareness and training to authority members create difficulty in IFRS adoption. In the similar note, Irvine & Lucas (2006) stated that in certain nations especially in developing nations, adoption of IFRS leads to external environment challenges such as political and cultural. Irvine & Lucas (2006) argued that in the implementation of IFRS, difficulty in adoption of suitable regulatory system to evade cultural issues such as secrecy create challenge.

Odia & Ogiedu (2013) presented that IFRS adoption reflected to be challenging for EU and various other nations, as it involves difficulty in ascertaining the importance, manner, reasons and the time to incorporate the standard. The authors also presented cultural, intellectual, legal and political issues in adoption. The professionals also lack understanding of technical knowledge, manner of computation and require additional knowledge to adopt the standards, which further resist IFRS. US, wherein GAAP was followed from years, IFRS adoption is likely to create drastic alterations in financial statements. Moreover, difference between these two accounting standards is broad as well as deeply rooted. The nation’s regulatory bodies perceived of the possible challenges that would arise to create awareness along with the impact on financial statement users (Madawaki, 2012).              

Arguments

The report by AASB (2009) highlighted that in the year 2002, Financial Reporting Council (FRC) given strategic direction to IFRS adoption in Australia from Jan 01, 2005. The decision was taken at the same time during EU IFRS adoption. The regulatory body of Australia expected its adoption would assist to leverage more capitals and reduce Cost of Capital. The adoption of this accounting standard is expected to be lower than the preparation cost and make the financial statement useful for multinational entities. Australian regulatory body affirmed that IFRS would help in filling Australian GAAP lags in financial statement disclosures. However, regarding IFRS adoption, discussions and arguments have been raised whether its adoption benefit Australian economy. Unfamiliarity of the companies and auditors to apply the principal of IFRS was also the growing challenge in its adoption. Australian Accounting Standards Board (AASB) face challenges from Australian entities regarding their raising concern about options included in IFRS, which was not previously involved in AGAAP. Odia & Ogiedu (2013) argued that Australian GAAP reflected to be more principles based on the other hand; IFRS is liberal in comparison to the Australian GAAP. Inclusion of more choices under the accounting standard of IFRS resulted to raise the requirement of high professional judgment and understanding, which created difficulty in pathway of its adoption. IFRS is inferred to be more comprehensive in acknowledgment, evaluation and ascertaining post-employment benefits, which was not present in the Australian GAAP. In addition, the requirement of additional cost in implementation and Australian entities freedom loss were the big issues in its adoption (Odia & Ogiedu, 2013; AASB, 2009).   

Holloway (2011) highlighted that while adoption of IFRS, lack of training initiation and education posed key challenges. The problem for the entities, auditors, regulators as well as the interesting parties who are familiar with previous accounting standards and requirements of gaining addition skills for application and evaluation of IFRS are the key issues faced in Australia while its adoption. There was also raising concern about Australian law compatibility with IFRS adoption in certain accounting principles including presentation format. Australian entities were also concerned about the uncertainty of tax treatment. However, Asiemo (2013) stated the issues regarding instability and subjectivity in IFRS adoption, as fair value reflected to be the base of evaluation of majority of financial statement items in IFRS. Moreover, financial results presentation under IFRS accounting standard was also different that take of domestic standards, because business contracts needs to be re-negotiated with respect to depiction of exact valuation in IFRS. These factors evolve challenges in replacing the existing accounting standard with new provision (Vinayagamoorthy, 2014).

He, Wong & Young (2009) presented that IFRS earnings and equity valuation are not value relevant in comparison to Australian GAAP, which indicates its significant challenge in its implementation. Ahmeda & Goodwin (2007) argued the viewpoint that reporting requirements in Australia prior to the IFRS initiation was governed with different regulators and their pro-version countermand, the Australian law similar to other nations accounting provisions. On the other hand, IFRS does not distinguish such countermand laws. During its adoption, Australian regulatory as well as legal provision created challenges due to which Australian entities were provide 2 years time to understand and adopt the change.             

IFRS Adoption Issue and Financial Accounting Concepts and Theories

Unegbu (2014) stated that accounting theory reflect the speculative interpretations of all the related transactions for deciding appropriate economic decisions. The fundamental concept in accounting is a going-concern, which reflects entities acquire long-term assets to carry out business performance for long period. The business entities and regulatory processes challenge in IFRS adoption, as it requires drastic alteration in reporting of financial aspects that probably create difficulties for the businesses. Hanefah & Singh (2012) stated that accounting theories include various assumptions, principles and fundamental framework of evaluation of the financial information. IFRS requires integrating one principle approach of accounting towards other and requires superior professional judgment for not only to business entities, but also to the interesting parties, which reflected to be the key reason of obstructing its adoption.

Vinayagamoorthy (2014) mentioned financial statement recognition, analysis and measurement are fundamentally based on accounting standards. Adopting IFRS requires high fair value utilization and alter mechanism of assets and liabilities calculation as well as interpretation. These accounting concepts are the key reasons in obstructing utilization of IFRS. Madawaki (2012) presented that IFRS led to alteration of the prevailing reporting model, as it is not in line with the pre-adopted accounting principles, which possibly result to difficulty. IFRS made easier for the companies to compare the financial position of the business with peer companies, but the business need to bear additional cost and acquire skills that resulted barrier in its adoption. Challenges also remain in IFRS adoption, because it results to adoption of more accounting principles, theoretical approaches and concepts that are applicable in global context. However, the lack of understanding about various businesses regarding the possible impact of IFRS adoption in the information systems creates difficulty. IFRS adoption problem mainly evolved in various nations due to the fundamental alteration in the reporting approach of financial statement, which are backed with obvious regulatory issues, high awareness, and involvement of cost and legal provisions that are difficult to deal. The IFRS adoption challenges also related with the accounting concept of cost and benefit, as it has been argued in various literatures that regulatory bodies face difficulty to evaluate the benefits of new accounting provision adoption over the cost involvement (Holloway, 2011).

Conclusion

Based on the above discussion, it can be inferred that IFRS was certainly an important measure adopted in 2001 with having emphasis on enriching the financial disclosure standards. The standard allows better comparative positioning of financial statements to stakeholders to evaluate entity’s financial statement with its competitors. However, IFRS adoption in Australian context was challenging, as it was more based on principles and reflected to be more liberal in comparison to Australian GAAP. Requirement of high professional judgment in evaluation of disclosure are the other key challenging aspects relating to IFRS adoption. Compatibility issues of Australian law concerning ISFR, legal, cultural and political consideration were also been the challenging factors in adoption.      

References

AASB 2009, IFRS adoption in Australia, Australian Government, viewed 14 July 2016, 

Ahmed, K & Goodwin, J 2007, ‘An empirical investigation of earnings restatements by Australian firms’, Accounting & Finance, vol. 47, pp. 1-22.

Ankarath, N, Mehta, K J, Ghosh, T P & Alkafaji, Y A 2010, Understanding IFRS fundamentals: International financial reporting standards, John Wiley & Sons, US.

Asiemo, P 2013, ‘Managing the challenges of IFRS transition: An operator’s perspective’, The Institute of Chartered Accountants of Nigeria, pp. 1-19.

Hanefah, H M M & Singh, J 2012, ‘Convergence towards IFRS in Malaysia: Issues, challenges and opportunities’, International Journal of Business, Economics and Law, vol. 1, no. 2, pp. 85-91.

He, X, Wong, T J & Young, D 2009, ‘Challenges for implementation of fair value accounting in emerging markets: Evidence from IFRS adoption in China’, Shanghai University of Finance and Economics, pp. 1-42.

Henderson, S, Peirson, G, Herbohn, K & Howieson, B 2014, Issues in financial accounting, Pearson Education, Australia.

Holloway, R 2011, ‘International variations in IFRS adoption and practice’, University of London, pp. 4-38.

Irvine, H J & Lucas, N 2006, ‘The globalization of accounting standards: The case of the United Arab Emirates’, University of Wollongong, pp. 1-24.

Madawaki, A 2012, ‘Adoption of international financial reporting standards in developing countries: The case of Nigeria’, International Journal of Business and management, vol. 7, no. 3, pp. 152-161.

Odia, J O & Ogiedu, K O 2013, ‘IFRS adoption: Issues, challenges and lessons for Nigeria and other adopters’, Mediterranean Journal of Social Sciences, vol. 4, no. 3, pp. 389-399.

Pacter, P 2015, ‘IFRS as global standards: A pocket guide’, IFRS Foundation, pp. 7-204.

Unegbu, A O 2014, ‘Theories of accounting: Evolution & developments, income-determination and diversities in use’, Research Journal of Finance and Accounting, vol.5, no.19, pp. 1-15.

Vinayagamoorthy, A 2014, ‘Opportunities and challenges in adopting IFRS in India’, International Journal of Business and Administration Research Review, vol.2, Iss. 3, pp. 132-136.

Zakari, M A 2014, ‘Challenges of International Financial Reporting Standards (IFRS) adoption in Libya’, International Journal of Accounting and Financial Reporting, vol. 4, no. 2, pp. 390-412.

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