Australian Companies are required to adopt International Accounting Standards by 1 st January 2005. What are the reasons for this move and what problems does it cause for financial reporting by these companies?
Before we touch on the reasons and problems on financial reporting by Australian Companies, I shall give a brief introduction of International Accounting Standards and its impact on Australian Companies.
Under the strategy announced by the Financial Reporting Council (FRC) at its meeting on 28 June 2002 and publicly announced on 3 July 2002 (refer FRC Bulletin 2002/4, 3 July 2002, web), the Australian Accounting Board is obligated to work towards the full implementation of International Accounting Standards in Australia in respect of financial years commencing on or after 1 January 2005.
The objective for creation of a set of international accounting standards is premised very much on the assumed resultant enhancement to the efficiency of the capital markets and the consequent reduced cost of capital that would result from the existence of a set of globally acceptable accounting standards that resulted in high quality, comparable and transparent financial reporting.
This is evidenced by the fact that the driving force behind the European Union's decision to require EU listed companies to prepare their consolidated accounts in accordance with IASB standards from 1 January 2005 is desire of the EU to create a single capital market. The fundamental to the success of the FRC 2005 strategy therefore is the ability of the IASB to have a set of high quality accounting standards in place sufficiently early so that companies in Australia are well placed to ensure their appropriate adoption on a timely basis. Reasons for Australian Companies to adopt IAS Reductions in the cost of capital through the resolution of uncertainty; Relating to the interpretation and implementation of national standards; Administrative benefits arising from the ease of filing in multiple jurisdictions and the resultant simplicity in the development of common accounting systems in place of adjusting, reconciling and explaining different bases applied in different countries; Enhanced comparability and transparency of financial reporting requirements and credibility of the reported information; Facilitation of cross-border investment and fund raising and the removal of an impediment to a more efficient allocation of resources; Lower investment risk because it reduces an element of risk associated with understanding foreign financial reporting for investors and lenders. Listed EU Companies will comply with IAS, this is the main driving force for Australian companies to move towards IAS. Australian Investors gain as IAS are superior quality and give rise to high quality financial reports. High cost of reconciling accounts between international regimes for Australian companies before the introduction of IAS.
Australia's small capital market means we need to conform to attract international capital. Reasons for Australian Users adopting IAS From the standpoint of the users of financial statements (e. g. investors, banks or owner) one can see the following advantages. Investors, banks or owners are interested in obtaining information, which enables them to make buy / sell /hold investment decisions.
We argue, that similar financial statements would make it possible for users of financial statements to make useful comparisons between countries and companies. This can be explained with the circumstances that similar transactions are accounted for and reported in the same manner everywhere in the world. With other words, similar Accounting Standards lead to a better comparability between companies. It would enable investors, banks or financial analysts to make better decisions.
Therefore, greater comparability results in better understanding, lower risks and more efficient selections of investments. Choi et al. argue that "financial statement users have difficulty interpreting information produced under non-domestic Accounting Systems. They claim that harmonization will make it more likely that users will interpret the information correctly, and thus make better decisions based on that information" (Choi et al. , 2002: 293). For the society at large it can be said that harmonized Accounting Standards are important, because they lead to a well-developed and good functioning capital market.
That is important in our view, because companies and others can raise money for investments there. This again is a pre-condition for a good economy and development. (Epstein and Mirza, 2001) The main advantage for Australian companies to use financial data would be the better comparability of financial data. In contrary Pellens asks, whether harmonized Accounting Standards are actually necessary for participants of the capital market. He argues that for understanding such rules, detailed knowledge of those is necessary. Maybe Pellens is right that not all analysts will understand the rules of IAS.
Therefore, we think it is important for the IASB to further work for an understanding of their standards. He argues further that national comparisons with competitors and branch information are in first line necessary, for analysts to make comparisons. He is of the opinion that only in second line international comparisons with foreign companies are made, which would mean that international Accounting Standards are not needed. (Pellens, 2001) We consider his last argument only to be true for small enterprises. International comparisons are in our view of high importance for the evaluation of the performance of global acting companies.
Another statement, made by Goeltz, is that global capital markets would even have developed without international Accounting Standards. (Goeltz in Choi et al. , 2002) We agree with Goeltz on that aspect. On the other hand it is obvious that the need for reconciliation or a full preparation of financial statements according to foreign Accounting Standards are barriers to the free competition of capital.
Problems cause in adopting IAS for financial reporting by Australian Companies. (A) The adoption of some IASC standards on issues where there is no equivalent Australian standard. The program involves the introduction of standards where there are no equivalent Australian standards, for example, borrowing costs, accounting for superannuation liabilities, provisions and contingencies and intangible assets. However, concerns have been expressed by the Business Community (Group 100) and others about some outcomes of the program for example, the failure in ED 84 "Acquisition of Assets" to propose harmonisation in respect of pooling of interests. The Group of 100 has indicated to the Board that the process of harmonisation will involve a balancing of some benefits (such as harmonisation with some requirements that are not presently permitted in Australia, for example, pooling of interests) and some costs (such as removal of some current practices). (B) A challenging program of revision and harmonisation with new developments An important feature of the program is the renovation and refurbishment of the fabric of Australian standards.
Many standards, which were developed several years ago, are in need of care, maintenance and updating, for example, profit and loss statements, inventories, segment reporting, and extractive industries. This has not occurred because of a lack of resources and new projects being given a higher priority. The updating of old standards and the filling of gaps in the suite of standards will benefit the preparers and in particular, the users of financial reports. The harmonisation program and the cooperation between standard-setters, for example, the G 4+1, is also resulting in a convergence in the approach to issues, which are being dealt with at approximately the same time.
Projects on provisions and contingencies, impairment of assets, performance reporting and the recognition and measurement of financial instruments have been initiated during this period. It is anticipated that an enhanced financial reporting framework resulting from the program will provide more relevant and reliable information for decision making which will result in improvements in the efficiency of capital markets and in corporate governance and accountability. (C) Effect on domestic standards Part of the price of globalization's is that the international standard-setter may not give Australian needs and circumstances the same emphasis, as would a national standard-setter. As such, in the absence of a strong national standard-setter with a clear brief on the quality of financial reporting and active participation in the development of international standards, there may be some erosion of quality in relation to domestic standards. However, the compensations for this are the benefits to the economy and international competitiveness of a move to international harmonisation, which is considered to be unavoidable in a period of globalization of commerce, technological and financial innovation.
We consider the following points as problems faced by the Australian companies: o Close relationship of IASB to philosophies of the Anglo-American Model o Convergence means only to harmonize IAS and U. S. -GAAP o Developing countries are neglected. The international harmonization process of Accounting Standards started somewhere in the 1960 s' and recent developments show that it is still going on. For us it seems interesting to reflect on this process and to ask about the characteristics (driving forces, actors, stages) of it. (D) Differences in International Accounting Standards Australia's harmonisation of financial reporting requirements with the wider global community would confront a number of impediments because of inconsistencies between Ias, US GAAP and EU Directives.
IASC-consistent reporting is unlikely to enhance Australia's link to the world community. This could lead to potential negative consequences in both financial and product markets. Nevertheless, Hegarty (1997) argued that purely national regimes are not conducive to the internationalization of markets, since differences in approach give rise to barriers to trade and investment. But it is problematic whether the choice of IASC standards is a step forward.
Moves to link Australian accounting standards to those of the IASC may be built on shaky ground, in that there is little evidence to suggest that this necessarily will improve international product and financial relations for companies reporting under Australian requirements. Given the magnitude of the potential downsides relating to the integrity and the comparability of financial reports and reporting in general, Australian professional bodies and the law need to consider their options carefully. (E) Legal system The Accounting world can be divided into "those countries which have a 'legalistic' orientation toward accounting and those with a 'nonlegalistic' orientation" (Nobes et al. , 1997: 8). The non-legalistic approach can be found in countries, which use common law. In common law countries, like Australia, Accounting does not depend upon law.
Accountants (professional organizations) arrange accounting rules. Hence, it is the private sector, which determines Accounting and not the law (Choi et al. , 2002). The task of the legal system is to give an answer to a specific case rather than to formulate general rules for the future (Choi et al. , 2002). The legalistic approach can be found in countries, which use the so-called code (or codified) law.
In contrary to the common law, the codified law system needs to develop rules in detail for the Accounting and financial reporting (Nobes, 1994). This means "Accounting rules are incorporated into national law and tend to be highly prescriptive and procedural" (Choi et al. , 2002: 43). In these countries the role of law is to describe behaviour, which is considered to be acceptable in the society (Choi et al.
, 2002). (F) Provider of finance The three main sources for external capital are shareholders, banks and government (Hill, 1999). It varies from country to country, which of these three provides most of the financial capital to companies. In countries like Germany and Italy banks provide companies with capital. In countries like Australia, shareholders provide companies with capital. The government is the provider of capital in countries like France and Sweden.
(Hill, 1999) This diversity of capital providers means that Accounting Practices differ in order to satisfy needs of capital providers. In the case of shareholder ownership, (e. g. in the Australia), information disclosure will be more important than in countries, where capital is raised from banks or governments. This is explained by the fact that in the latter countries information will be transmitted more directly. (Rade baugh and Gray, 1997) It is impossible for Australian companies to inform each shareholder with its specific information needs, because they are a big and unorganized group.
Therefore financial statements in the US and UK are "oriented toward providing individual investors with the information they need to make decisions about purchasing or selling corporate stocks and bonds" (Hill, 1999: 593). The Accounting Practices in countries with banks as main capital providers have an interest to protect bank's investment. This led to more conservative methods, which are characterized by overvaluation of liabilities and underestimation of assets (Hill, 1999). In countries where capital is provided by the government, Accounting Practices are oriented towards needs of governmental planners (Hill, 1999).
(G) High Initial Costs Difference in IAS and Australian Accounting Standard may result in extra cost involved that a change in the method of accounting practice. Initial cost will include re-training the accounting profession and the users of financial reports. Ongoing costs will stem largely form the need to identify, and even update for each reporting period, the tax base of assets and liabilities. Australian companies may face costs in installing systems that record the information in a way that enables the calculations to be readily performed. Current Concerns By Australian Companies A number of Australian companies and participants in the process have recently expressed concerns about the approach to harmonisation and the timing of the process. Overall, Australian companies support the principle of harmonisation but are concerned about: SS The approach on particular issues, for example, accounting for intangible assets; SS The effect of adopting a new accounting requirement in respect of transactions and arrangements which were structured and undertaken under previous arrangements; SS The perceived damage to competitive advantage resulting from the adoption of standards which are more restrictive than those applying to competitors; SS The intensity of the international harmonisation program and the resultant lack of time to adequately review the proposed changes, their implications for current practice and to prepare submissions on exposure drafts etc; and SS The process by which IASC standards are to achieve acceptance in international capital markets.
SS Australia's accounting conceptual framework is more detailed than IAS SS Adoption will dilute some of Australia's current accounting standards. SS Australia's superior accounting standards represent a competitive advantage in a corporate world full of uncertainty at present. SS Australia represents just 1% of the global equity capital market. SS Adoption will result in the loss of Australia's competitive advantage and a higher cost of capital for Australian companies. Conclusion Harmonisation and convergence of accounting standards are no longer just buzzwords and nice to have, they are very fast approaching reality. Although Australian standard-setters have been harmonizing the country's accounting standards with IAS for a number of years, the move to full compliance with IAS still came as a great surprise to both the accounting fraternity and the corporate world, not only because of the short time frame for full compliance but also because of the wide ambit of its application.
While harmonisation has brought about many similarities between Australian standards and IAS, some substantial differences and gaps between the two sets of standards do exist. It is particularly the existence of these gaps in the Australian suite of standards that will have far-reaching impacts on the future financial reporting of Australian companies. They also present a great challenge for Australian companies in getting themselves ready for the new reporting regime. Recommendations To allow Australian companies easily adopt the International Accounting Standard, I would like to make the below recommendations: First, IAS should consider the distinctive features on Australian market especially where the market economy is evolving.
So that Australian companies can easily adopt IAS. Second, IAS should allow alternative treatment in special case. For example, IAS should provide for another measurement basis, such as historical cost, when fair value is unable to be determined reliably. Third, based on the current presentation of IAS, I suggest that IASB expand explanatory notes, implementation guidance and background information of each standard It will reduce the difficulties faced by standard setters and Australian companies while adopting IAS.
Fourth, I recommend that IASB publish IAS training materials to facilitate the education of the accounting profession and to improve their understanding and implementation of the standards.