Due to global economies and the market becoming more liberalised companies are also operating on the global basis, cross borders and nationalities,Â and as a result there is a strong desire to adopt universalÂ accounting standards.Â The attempt commenced by the IASB which issues the IFRS that more than 70 countries and the EU has adapted into. (Deloitte, 2008). Australia is a 'common law' based country that followed the implementation of IFRS as the same time as European countries (Jeanjean, Stolowy, 2008).
ThisÂ standardisation will allow companies to haveÂ a uniformÂ approach through all their cross border operations in line with their global presence. Â The results of this will improve efficiency and reduce cost, for example consolidation of company accounts with multiple branches in different countries would not require translation and adaptation to meet other cross border laws. (Faux & Wise, 2005). This also improves corporate governance and provides accounting transparency reducing the risk for all the stakeholders involved,Â such as; shareholders, directors, managers and customers. (Cotter, Tarca & Wee, 2009).
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The link between corporate governance and management accountabilityÂ also means that suchÂ standardisation of accounts removes risk of fraudulent activities within the company structure. "Hence, it enables investors, financial analysts and authorities to lower their risks and make better investment choices" (Cotter, Tarca & Wee, 2009). Before the implementation of IFRS it was predicted that the accounting quality would be better off, the investors will be protected in the financial markets and it could help to prevent companies from economic disasters and it will be easier to make transactions between countries leading to an increase in competitiveness through foreign investment and other activities. (Jeanjean, Stolowy, 2008).
For all these reasons Australia has decided to adopt International Financial Reporting Standards in 2005. This decision has had a great influence on the recognition, measurement and disclosure of assets, liabilities, equity and profitability (Taylor, 2008). It also has changed the reporting framework. The conversion from Australian General Accepted Accounting Principle (GAAP) to IFRS has a vital influence on a number of important areas of financial reporting and taxation. This report focuses on the recent problems and issues faced by Australian companies since the adoption of IFRS.
2. Recent issues and problems that Australia faced since the introduction of IFRS
2.1 The problem of derivatives, fair value and disclosure
The implementation of IFRS in January 2005 had an impact in Australia causing some problems and issues as well as some benefits. Transparency and harmonisation are some of the benefits obtained from IFRS due to globalisation. The world requires standardisation of practices to simplify the interaction and transactions between countries. It will take time to adapt to this new accounting system as it has been seen that some aspects have to be adapted or changed according to the nature of the country but IFRS will definitely lead them to more comparability. The main difference between GAAP and IFRS is that "GAAP is rules-based and IFRS is principles-based". (Diana, 2008). Different stakeholders from financial analysts, auditors, regulators and report users are affected by the new reporting standards. (Finch & Carlin, 2008a).
In Australia the use of IFRS is compulsory for all domestic listed companies and its compliance is stated in an audit report. (Deloitte, 2009a). One of the main issues from the change to IRFS for companies was the restriction to capitalise intangible assets. (Ekberg & Lindgren, 2007). According to Chalmers, Clinch and Godfrey (2009) some variables were affected some of the positively as the net income gained relevance. Some other aspects also were impacted as the goodwill amortization, disclosure and require the use of fair value (market value) instead of historical value (book value). (Finch & Carlin, 2008b). The use of the fair value instead of book value permits firms to report unrealised gains, but due to the Australian law regarding dividends firms were only allowed to pay dividend from profits, so this way firms would be affected if they had to pay dividends from this gains. (Evans, 2005).
Goodwill is one of the main problems that Australian companies faced since the implementation of IFRS. Before 2005, companies used to do goodwill amortisation periodically, with IFRS they had to move to an impairment testing system that caused them several issues. As it was shown in a study driven by Finch & Carlin (2008b) some firms had some problems because they did not comply the IFRS disclosure requirements for this kind of testing.
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The classification, measurement and disclosure of financial instruments are aspects that changed with the adoption of IFRS. The main reasons the change of the classification affected them is because the measurement and recognition of the fair value is vital for companies, the determination of derivatives to classify them as assets or liabilities and another issue is that it will not always be possible for them is hedging. (Taylor, Tower, Van Der Zahn & Neilson, 2008).
Hedging is another issue that arose from the change "IFRS rules have contributed to a decline in both speculative activity using derivative products, but also on the effectiveness of economic hedging."(Finch & Carlin, 2008a). The use of fair value increased the volatility of their information and results. (Deloitte, 2009a). As it was predicted the analysts were benefited by the implementation of IFRS due to the disclosure of the financial statements, the companies had less errors than they had before due to the accuracy of the information available for them to forecast their earnings. (Cotter, Tarca, Wee, 2009).
2.2 Business combination and tax consolidation
The adoption of The Australian Accounting Standard Board defines Business combination as "the bringing together of separate entities or businesses into one reporting entity" (AASB 3 'Business Combinations' Summary, n.d.). After the implication of IFRS, since 2005, the transaction related to business combinations must be reported under the Corporation Act and the purchase method has to be applied. However in early 2005, Australia revised AASB 3 and excluded business combinations involving business under common control. However, the Accounting Standards Board revised the situation and agreed on developing the framework to harmonize the implication of IFRS (regulation impact statement). The impact of the adoption of these standards will lead to an increase in the deprecation and amortisation expense (as the amortising cost and fair value has been discussed earlier).
According to AASB 107, sector 33-35, the interest paid and interest and dividends received can be recorded as either operating cash flow as they decide the net profit or loss of the company or they can be recorded as financing or investing cash flow as they are tool of gaining financial resources or return on investment. (AASB 107 Cash flow statement, 2004). "Dividends paid shall be classified as a financing cash flow because they are a cost of obtaining financial resources." (AASB 107 Cash flow statement, 2004).
Australian entities will have to disclose higher cash flows as interest and dividends are to be recorded as operating cash flow, rather then international entities. The earnings per share according to AASB 133, EPS can be recorded as alternative 'earning', provided that the average number of share used to calculate the EPS should match with the standards set by the AASB, alternate if the company undergoes major reconstructive changes in reporting period, the details should be provided. (AASB 107 Cash flow statement, 2004)
The impact of this provision is that it gives an advantage of having greater flexibility rather then other countries, where EPS information has to be disclosed based on alternative earning and the standards are kept strict then Australia. This means that Australian entities can disclose earning per share, as their alternate income while other international countries could not.
One of the main impacts on tax consolidation for Australia is that IFRS does not allow for inventories the use of LIFO, so the companies that use this accounting method will have a high tax cost. (Deloitte, 2009b). Another problem is that every member's assets and liabilities are seen as property of the head entity for the tax consolidation. (Deloitte, 2005).
Deferred tax consolidation and income tax expense are closely recorded with their counterpart of tax consolidation hence cost of business can be determined. The head entity has the obligation for tax entitlement and is counted on any benefits or loses, and hence the head entity determines the aggregate current tax liability and the benefit of any tax losses and tax credits in the tax-consolidated group. (Interpretation and Application of Standards, 2009). "The uncertain economy is causing the balance sheets of many entities to suffer write-down and impairments across their asset classes". (Chaho, 2009).
Each entity from group that is reporting entity has to report a consolidated financial statement. Earlier the parent company used to prepare a general consolidated statement so whether the parent company's debt or equity instruments are traded or not was not clear. With the requirement of providing separate consolidated statement, it brings more transparency, however the Australian entities are subject to more detailed reporting as compared to their international counterpart which may occur more reporting expense, but this provision brings more transparency in the market. (AASB 127 Consolidated and Separate Financial Statements, 2008).
2.3 The case of small and medium size entities: a lot of con
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Australia has decided to adopt the IFRS standard in 2005. The impact of IFRS adoption on small and medium size entities is an important issue in Australia. Many Small and Medium-sized Entities (SMEs) directors think that IFRS was written only for multinational listed companies and do not fit to SMEs (Basford, 2007). Moreover, Basford pointed out that in Europe IFRS were applied by listed companies to consolidate their group account whereas the small and medium companies have continued to work under their national Generally Accepted Accounting Principles (GAAP). In Australia SMEs had to adopt IFRS leading to a lot of confusion when the company is a reporting or a non-reporting entity.
In fact, IFRS standards are very confusing to prepare for Australian SMEs in the sense that we do not know who should prepare a general purpose financial report and, if no general financial report is prepared then, which standards should be applied. (Basford, 2007). At the moment, every reporting entity prepares reports that comply with the Australian Accounting Standards Board (AASB) standards. But in order to meet the IFRS requirements, AASB proposes to remove the reporting entity concept. If the change happens, then the application of AASB standards will depend on the fact that companies prepare a General Purpose Financial Report rather than on the fact that they are reporting entities or not, that is really confusing.
Another negative aspect regarding the application of IFRS for SMEs is that Australia has adopted IFRS that applies to General Purpose Financing Report rather than reporting entities. The AASB has made the tentative decision that any company required to prepare a financial report under the Corporations Act is automatically producing a general purpose financial report. Therefore, the IFRS for SME automatically apply. But according to Keith Reilly, there is no point to force non-reporting entities to enter into an IFRS for SMEs framework.
There is also a big issue regarding the report that companies will have to produce in terms disclosure and complexity (Shapiro, 2007).
"The ramifications of these changes are fundamentals to financial reporting in Australia and would radically alter the obligations of both directors and auditors. Many companies which are currently preparing special purpose financial reports would find them self-facing a far more stringent regime with a much greater burden in term of disclosure requirements. That would inevitably result in resourcing issues and directors having to sign off on financial statement so complex that even the financial literate might feel out of their depth." (Shapiro, 2007).
The cost of the adoption process of IFRS for SMEs is very high. According to Jim Service it will cost millions of dollars and without any benefits for the company. Service also points out that such report does not fit to small group of owners of non-listed company. The complexity and the large amount of information contained in this kind of report would be useless. Furthermore, doing a General Purpose Financial Report for SMEs takes few more weeks to compare to a Special Purpose Financing Report and require much higher audit fees. In other words, IFRS bring costs and complexity to SMEs and affects their competitiveness.
In line with Europe, Australia has decided to adopt IFRS in 2005.The expected benefits of this adoption were many: to attract capital to Australia in order to lower the cost of capital, lower the cost of preparers, auditors and users of multinational entities financial reports and fill some gap in Australian GAAP. (AASB, 2009).
Our study shows that Australian companies have faced many problems and issues during the process of adoption regarding the classification, measurement and disclosure of financial instruments, the business combination and the tax consolidation. It was also pointed out that IRFS perfect for multinational companies, but not so for SMES. Besides it was irrelevant to apply them to non-reporting entities because of the cost and usefulness of the General Reporting Principle Financial Report for the different stakeholders.
Even if some mountains have been climbed, the outcomes so far are positive: Australian entities' financial reports are more readily understood worldwide. There are more synergies in the preparation, audit and analysis of Australian financial reports for entities that are part of a multinational group. The Gaps in AGAAP has been filed in the area of financial instrument recognition and measurement in particular. All in all, IFRS adoption in Australia had a lot of really good and some bad effects, which will be solved in the future for the interest of all Australian companies.