Reasons For Accounting Standards Developed In Australia Accounting Essay

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The main purpose for this assignment is to identify the reason and the way accounting standards established in Australia as well as to suggest whether Australia should continue developing its own accounting standards. The topic related with this assignment is the Australian Accounting Standards (AASs) with the key issue of global business environment. The key concept associated with this assignment is the financial reporting, AASs and International Accounting Standards (IASs).


Accounting Standards help defining the typical accounting procedures needed to be complied with when conducting certain business transactions.

Reasons for accounting standards developed in Australia

In19th century, the growth of industrialized society has raised the concern for developing consistent accounting standards. There are many big business corporations formed during this period and this result in the separation of ownership from management. As a result, financial reporting has become an important requirement in presenting results of stewardship of management or accountability of management for resources and trusted to it.

Between year 1950 and 1960, many corporate failures have occured and the low quality of information presented in financial statements is believed to be the main contributor to such problem. Additionally, Australian government is under pressure to improve the transparency of financial reporting. Consequently, this brought to the establishment of consistent accounting standards in Australia. Under AASs, there is a conceptual framework which indicates the information the financial statements must provide for financial reporting. Hence, the primary aim Australian Government establishes AASs is to provide useful financial information about business entities for external users such as investors and creditors to make their economic decisions (AASB, n.d.). The financial information provided in compliance to accounting standards should be precise and comparable. This is to facilitate external users in making better economic decisions and utilizing their limited resources efficiently as well as effectively.

Businesses are not only operated by owners, the business functions are also divided among shareholders, staff, etc. This as a result may lead to information asymmetry regarding the valuation of assets. This issue arises due to insider managers are more well-informed as compared to external shareholders about the information on financial investment. Yet, the division of business functions could bring to the abuse of financial information. This problem is proved in Lloyd case during year 1980 as default information was detected among branch offices and headquarters due to different accounting practices being applied. By practicing accounting standards, every stakeholder can have more precise financial information for enhancing their economic decisions and thus have their interests protected (Meeks & Swann, 2009).

With consistent accounting standards being nationwide applied, investors could gain confidence and market integrity can be enhanced from the comparable financial information, therefore easing the cost of capital of economy (Beke, 2010).

The setting process of AASs

AASs are established by Australian Accounting Standards Board (AASB) and are implemented based on the codes of ethics underlining them.

To develop new AASs, new technical problems must be detected by International Accounting Standard Board (IASB) or International Public Sector Accounting Board (IPSASB).

After identifying a technical problem, a project proposal is formed by AASB. The project proposal consists of the costs and benefits for carrying out the project. The project is then reviewed by AASB. If the project is valuable, AASB will add the project to its agenda.

The AASB staff members will then conduct a research on the technical issue that has been added to the agenda. Following the completion of research, a set of related documents such as draft interpretation and invitation to comment are prepared to be communicated and consulted with stakeholders.

Once the consultation with stakeholders has taken place, AASB will issue a pronouncement such as a conceptual framework document. After the pronouncement, AASB will provide submissions to international organizations.

Lastly, AASB will conduct a close monitoring during the execution of accounting standards as well as interpretations with the assists of other proficient accounting bodies like Australian Prudential Regulation Authority (APRA) in its home country.

Forces for change

In the past, national accounting standards play a vital role in providing guidance for financial reporting. There are several factors affecting the development of national accounting standards. One of the factors is the political and legal system in a country. This factor influences the accounting standards in different countries based on whether they are common law or code law states (Sawani, n.d.). For instance, ‘common law’ countries such as England and Australia define accounting standards as standards or recommendations. Meanwhile, ‘code law’ countries like Taiwan define accounting rules as part of legal system.

Besides that, national accounting standards are also highly affected by economic factors and the characteristics of capital market in the country itself (Sawani,n.d.) For instance, the participants in Germany capital market are mainly creditors and banks. Thus, the financial reporting in Germany aims to protect more on the interests of creditors. On the other hands, the financial reporting in US emphasizes the protection of investors since the US capital market is equity-based. This has inevitably led to a multiplicity of accounting standards around the world.

However, the demands for setting IASs have increased nowadays. Pros claimed that the harmonization of accounting standards globally will bring to more comparable financial information throughout the world. It is argued that the greater the international comparability, the better the efficiency of economic decisions made by users (Goh & Cheam, 2010).

There are many benefits via executing IASs. Firstly, adopting IASs help reducing complexity resulting from the existence of multiple accounting languages. In addition, IASs promote financial innovation via providing variety of investment opportunities across the world as a result of the greater comparability of financial information. Furthermore, IASs reduce the barriers to entry to capital market by reducing the additional costs resulting from meeting different financial reporting requirements (Sawani, n.d.). Yet, IASs enhance the efficiency in cross-border capital flows through expanding international funding base and reducing extra reporting costs. Moreover, IASs will bring to the improvement in accountability and transparency over the world (Goh & Cheam, 2010). Lastly, universal accounting standards possess an intrinsic benefit which is they do not eliminate the existing national accounting standards which may be met by nationalistic opposition (Sawani, n.d.).

In conclusion, with globalization of economies, there is a need to have a single set of international standards which are internationally comparable. Hence, Australia should fully adopt IASs instead of continue developing its own accounting standards. By fully adopting IASs, Australian can also maintain its existing national standards in turn to suit its own legal and economic system.