Advantages and Cost of Adoption in Australia of International Financial Reporting Standards (Ifrss)

Epstein, Barry Jay. "The Economic Effects of IFRS Adoption." CPA Journal. (2009): 26-31. Web. 27 Mar. 2012.

Access to capital markets in United Kingdom is easy after the adoption of IFRs. Public capital markets play an important role in financing the activities of non-financial companies in the United Kingdom, providing them with the main option to bank loans and private sources of finance. These set of international accounting standards helped reduce the information processing and auditing costs to the UK’s market participants. With the help of adoption of IFRS it is expected to lower information costs to capital markets, and the UK

Standardized reporting across firms from different countries would facilitate cross-border investment and the integration of capital markets (Hail, Luzi, et al). According to Beke (2011), Standardization implies the “elimination of alternatives in accounting for representing economic transactions and other events” (Angeloni). In essence, similar events and transactions would be reported in a similar manner, and vice versa. Having more comparable reports allows firms to make better-informed investment choices due to a better understanding of competing firms, which can lead to cost savings. Moreover, firms that have more comparable reports can better contract with suppliers and firms in other countries, and these contracts are more likely to be fully specified and enforceable. Studies also show that the adoption of IFRS reporting should be associated with an increase in market liquidity, as well as a decline in firms’ cost of capital (Hail, Luzi, et al.).

A set of internationally recognized accounting standards facilitates capital flows across borders. Globally accepted standards make financial information readily comparable for its users. Foreign investors are more inclined to put money into a U.S. company if they are familiar with the company’s financial reporting. Conversely, U.S. investors will find it easier and less risky to invest in foreign companies when they know the local accounting standards (Epstein 2009). This will make U.S. companies and capital markets more competitive, since it saves costly reconcilition of different standards. Preparers, investors, auditors, and others will benefit from these cost effieciencies, since a Results of an IFAC Survey among accounting leaders around the world with respect to the importance of convergence to International Financial Reporting Standards for economic growth in their countries:

The very first concern relates to the subject of recognizing and measurement requirements compared to the full IFRSs. Moreover, there is criticism about the hierarchies for choosing accounting policies, since its consequence is the disparity of accounting policy choices in different entities (Australian Accounting Standard Board 2010). The other concern is about the training and education costs for both tertiary and profession level. AASB also requires the IFRS for SMEs to include more topics and treatment options in order to meet its stand-alone objective. Several comments about the suitability of IFRS for SMEs for Tier 2 were noted by AASB. For example, favorable accounting policies for Australian companies have been replaced; subsidiaries are forced to adapt to new policies since parents comply with full IFRSs; changing in the requirements of recognition and measurement do not produce any sort of future economies for SMEs in Australia. Therefore, AASB will choose to continue monitor and assess the possibility of adopting IFRS for SMEs in the future, and adopts RDR as an alternative since there are overwhelmingly positive support for it over the IFRS for

International comparability of financial statements attracts capital from foreign investors and reduces the barriers to cross-border capital flows. When international accounting standard replace domestic accounting standard, corporate discourse is reduced. This enables investors to monitor managerial performance better because information asymmetry is reduced. IFRS adoption made it easier for companies in U.K to access the capital markets (Lee, 2008).

Regarding the commitment to International Harmonization policy, AASB adopted International Financial Reporting Standards (IFRS) on January 1, 2005. The outcome is Australian International Financial Reporting Standards (AIFRS) accepts the de-recognition of all internally generated IAs. The investors in Australia expect to get information regarding to the IAs is provided by AASB 1047.The gap between actual and expected value has been decreased and more transparency because of the change in regime. There was no standard equality of AASB 138 before AIFRS, which provides information about asset without physical existence such as trademark, brand, and so on. AIFRS is used to adjust IAs have been recorded previously which are internally produced and revalued all previously assets are recorded follow by historical cost because asset cannot revalue unless it has a secondary market to base on before revaluing the asset.

This report has been compiled for the Chief Accountant of the Australian Securities and Investment Commission (ASIC). Its aim is to provide an analysis of how international financial reporting standards (IFRS) have improved reporting quality. This report found that there has been a recent move to using these standards as a blanket standard in most Western countries as the need for consistency in financial reporting is obvious in a more globalised world.

The journal article named “The effect of IFRS Adoption on the financial reporting of local government entities” By Kamran Ahmed and Manzurul Alam aims at finding the changes of key accounting components surplus, equity and asset while changing accounting policy from Australian Accounting Standards (AAS) to International Financial Reporting System (IFRS).Introduction of International Financial Reporting System (IFRS) is thought to be a paradigm shifting event in financial reporting system. Australia is one of the first countries to adopt IFRS for the local government. It was a great challenge taken by Australia to adopt IFRS before USA and EU. In 2004 Australia adopted IFRS to their accounting policy. Afterwards, through the

IFRS raises efficiency and it reduces the cost of processing financial information, which the stock market incorporates it in prices. Most investors can be expected to gain from increased market efficiency(International

Countries that have adopted IFRS in its totality have done so in a gradual and coordinated manner, allowing for transition periods. For example in Brazil financial institutions had between 2007 and 2010 to comply with IFRS. As for Korea, the Financial Supervisory Commission and the Accounting Standards Board of the Republic of Korea, after years of consultations and ground work, announced in 2009 to permit all companies other than financial institutions to apply IFRS as adopted by Korea, but set 2011 for IFRS to become mandatory in the country. In the case of India, it commenced IFRS transition in early 2007 when the Institute of Chartered Accountants of India formed an IFRS convergence task force to look into the various convergence issues and prepare a road

The outcomes on cost of capital required would be lowered as it improves the liquidity of the company within the market under the new regulations that is the IFRS. Many authors such as Daske et al. (2008) and Li (2010), along with Florou and Kosi (2009) have conducted studies to see if these results materialize in adopting the new jurisdiction. A study done by Li in 2010 shows that in 2005, the cost of equity has declined by 47% under the new regulations. Daske et al (2008) found mixed evidence about the effects of the adoption of IFRS. His study was based on the Liquidity of the capital market under the new regulation. In addition to this study, Florou and Kosi decided to look into another dimension by analyzing the impact of debt financing on capital markets. It was surprising to find that the yield was 39 basis points lower by companies that have adopted the International Standards.

The chief objective of this report is to describe the advantages and disadvantages of International Financial Reporting Standards (IFRS) conceptual framework in general. The report also directs attention towards Australia’s step towards harmonization of the accounting standards and as well as on international financial reporting system. However, the prime focus of the report is on the adoption, implementation and the impact of IFRS framework in a developing country, Bangladesh. The very report advocates that the adoption and implementation of IFRS framework has both positive and negative sides. In spite of financial and time constraints in adopting IFRS every nation is keen towards being a member of IFRS accounting standards. It is because countries want to trade globally and for such purpose they need investors. In order to attract and retain such potential and existing investors firms/organization need to follow certain accounting standards in generating the financial reports that are accepted worldwide. Finally, the report concludes that the worldwide harmonization of accounting standards has many future benefits along with some short term obstacles, however, it is difficult to apply the same accounting standards worldwide as each and every country differs from another in respect of its enforcement mechanism.

IFRS is an international accounting standards that were developed by the International Accounting Standards Board (IASB). These standards define how a company should report its financial statements based on accounting principle rather than “rules-based accounting standard” like US GAAP (Dumont, 2012). According to AICPA, IFRS standards can help businesses to have the same financial statements like their competitor as well as attracting foreign investors. In addition, a company that has subsidiaries in different countries would have a uniform financial statements company wide. However, convergent process can pose a serious issue for U.S. businesses in terms of financials and internal controls due to the fact that US GAAP focuses more on details for reporting purposes. Many U.S. companies believe that US GAAP is the golden rule and the huge amount of converting cost would offset the benefits that IFRS offers (AICPA, 2015).

Tyrrall, Woodward, and Rakhimbekova (2007) emphasize several advantages with the IFRS adoption: 1) enlarge status and quality of financial reports, 2) setup costs related to development of local standards get eliminated or reduced, 3) increased efficiency in national and international markets due to more understandable,