Australian vs International Accounting Standards - Research Paper Example

Discussion of Australian and International Accounting Standards Setting Bodies and the Application of AASB 107 and AASB 1031 Name: College: Course; Tutor: Date: Introduction Australian Accounting Standard Board has the responsibility of setting accounting policies which should be adhered to by all business organizations operating in Australia. However, some of its policies do not conform to that of International Accounting Standard Board thus causing a lot of complexities for Australian business organizations operating in other continents. This calls for convergence of international accounting standards. Both national and international accounting standards setting bodies have major roles in interpreting and converging international accounting standards. Though some individuals and bodies argue that different types of entities need different set of accounting standards, converging national accounting standards with international accounting stands has significant benefits to both stakeholders. However, some international accounting standards need to be revised to ease the understanding and interpretation of financial statements such as cash flow statement. Coordination between national and international accounting setting bodies in interpretation and convergence of international accounting standards will result to effective international accounting standards which are of great benefit to all stakeholders. The Role of National Accounting Standard Setting Bodies in Interpretation and Convergence of International Accounting Standards National accounting standard setting body, AASB has a major obligation in ensuring proper interpretation and convergence of international accounting standard in order to foster its objective of providing best possible financial information to stakeholders. In order to attain its objective effectively, the national accounting setters have the obligation to monitor the implementation of international financial report systems in their jurisdiction, Australia. During implementation of the international financial reporting standards, issues of interpretation which arise must be dealt with by the national accounting standard. As a result, the national accounting standard setters have the reference power within the national jurisdiction as far as interpretation of international accounting standards is concerned (David 2006, p.90). Besides, national accounting standard setters are supposed to issue their own interpretations on issues which only affect their jurisdiction. Issues which relate to certain legislative and local requirements require no involvement of IASB (International Accounting Standard Board) thus the local standard setters are supposed to make their own interpretations. However, in order to avoid incompatibility with international financial reporting systems, the national body should liaise with the IASB before it issues a national interpretation (Ann & Philip 2007, pp.461). In order to enhance the effectiveness of converging accounting standards, the national accounting setters plays a major role in identifying and breaking national regulatory obstacles to adoption in international accounting standards. In many jurisdictions such as Australia, regulation on financial reporting is usually linked to other regulation forms. In this regard, the national accounting standard setters have the obligation to encourage or motivate national regulators to take part in international accounting standard convergence exercise in their respective regulatory fields (Thomson 2004). Besides, national accounting standard setters play a major role in encouraging their constituents to communicate their important views directly to IASB and to national standard setter, AASB. Moreover, the national setters plays a major role in ensuring that information from politicians, government agencies and other stakeholders in non-technical discussion reach IASB in time. Establishing round table forums on specific issues is another role of national standard setters to encourage their constituents to be involved in the convergence of accounting standards. Some important constituents may not be willing to make their views publicly known thus its upon the local standard setters to encourage them through relevant forums and communicate the issues discussed to IASB for further discussion. In addition, the national standard setters have the obligation to inform IASB any difficulties with a certain project for further discussions (Ann & Philip 2007, pp.461). The Role of International Accounting Standard Setting Body in Interpretation and Convergence of International Accounting Standards The International Accounting Standard Board plays a major role in interpretation of international accounting standards. The IASB issues interpretation on all international accounting standards which affect many jurisdictions. Incase of interpretation issue affecting two or three jurisdictions only, the IASB is supposed to facilitate communication among the national standard setters through maintenance of issues register. Besides, the IASB must avail itself for consultation during interpretation of various standards which affect specific jurisdiction. The IASB also has an obligation to interpret all international standards when demanded by certain jurisdiction regulators or national accounting standard setters. Incase the IASB fails to address issues raised by various constituents concerning standard interpretation, the IASB has the obligation to provide an explanation in order to help national accounting standard setters to decide on whether to pursue the issues further (Mary 2005, p.687). In order to attain effective convergence of international accounting, international accounting standard setters, IASB plays a major role by forming and interpreting accounting standards which are of great benefit to all jurisdictions. Besides, the IASB has the obligation to provide adequate comment time to give national accounting standard setters an opportunity to establish extra relevant material to put the IASB documents in national context and get feedback from constituents. Such a role is very important because it helps to stimulate debate on critical issues. Besides, IASB plays a major role by setting an environment that encourages comprehensive analysis of the IASB’s proposals. The IASB is responsible for providing an open process to ensure that issues raised by national accounting setters are given full attention (Thomson 2004). Besides, IASB is supposed to provide relevant information to all constituents and national accounting standard setters to ensure that they are more adequately informed of developments in the convergence process. To attain this, the IASB is supposed to arrange meetings with national accounting standard setters to discuss issues at hand and come up with possible solutions. This role encourages the participation of local accounting standard setters and other constituents in the process of converging international accounting standards (Thomson 2004). Different types of entities both local and around the world need a different set of accounting standards as current accounting standards are too complex and do not provide enough prescription In various jurisdictions including Australia, some financial report stakeholders have raised an issue that different types of entities both local and international need a different set of accounting standards to reduce the complexity of the accounting standards and provide enough prescriptions. There are various entities operating locally and internationally with different features of operation and aim of existence thus calling for need of different accounting standards. Entities can be classified into various types such as public and private organizations, profit making and not for profit making organizations, international and local. The International Accounting Standard Board in collaboration with national accounting boards has already established different accounting standards for aforementioned types of entities (Chris 2008, p.22). Such a move has led to simplification of financial reporting thus leading to proper understanding of the financial information by the stakeholders of the entities. However, much still needs to be done in ensuring that different set of accounting standards are utilized in various sizes of entities. Small entities are finding it hard and costly to adopt many of the accounting standards as compared to large entities (David, 2007). Small micro enterprises (SMEs) need to have their own accounting standards to solve the problem of dealing with undue complexity and sheer volume of existing accounting standards. Normally, only large scale entities are able to assemble resources and talents required to implement and apply the prevailing international accounting standards. In its 17th annual session in the year 2000, the intergovernmental working groups of experts on International Standards of Accounting raised the issue of obstacles encountered by SMEs in application of accounting standards that have been established by various national and international accounting standard setting bodies. This is a clear indication that SMEs require tailored accounting standards which will suite their operations. As a result, a project needs to be undertaken to explicitly identify suitable approaches that would precisely meet the accounting and reporting needs of small scale organizations (Danuse & Hana 2007, p.12). Accounting standards developed by IASB basically applies to public entities in developed countries thus failing to consider interests of entities in developing countries and countries undergoing economic transition. Bearing in mind that small scale organizations are very many as compared to large scale entities, accounting standard setting bodies have missed the main point by coming up with standards which favor large scale entities. As a result, it would be very important for standard setting bodies to subdivide entities into three categories based on their sizes. Setting different standards for different types of entities will help in enhancing the ease of adoption of the accounting standards. However, while establishing tailored accounting standards the standard setting bodies should ensure that the main objective of providing effective financial information to relevant stakeholders is interfered with. In other words, the accounting standard setters should aim at improving the quality of financial information while reducing the complexity of the accounting standards (Danuse & Hana 2007, p.13). Computercorp LTD’s quality of disclosure about Cash Flow Statement standard of AASB 107 AASB 107 provides directions on how business organizations should present their cash flow statements at the end of the accounting periods. The quality of cash flow statement is based on the extent on which an entity has adhered to the prescription of the accounting standards as prescribed in AASB 107. Generally, Computercorp Ltd. has attained high quality of disclosure of its 2007 cash flow statement. According to the AASB 107, cash flow statement should report cash flows during the period of operation divided into three major activities notably operating, investing and financing activities (Australian Accounting Standards Board 2007). Computercorp Ltd. has adhered to this requirement since its cash flow statement is subdivided into three major classes on which total amount of net cash flow is shown in each class (Computercorp 2009). Business organizations are allowed to use ether direct or indirect method while reporting operating activities. In direct method, major classes of gross cash flow are supposed to be disclosed. Computercorp Ltd. has used direct method in reporting its operating cash flow and has also disclosed major classes of gross cash flow such as receipts from customers, payment to suppliers and employees, finance costs and interest received thus satisfying the requirement of the standard. Business organizations are also required to disclose a reconciliation of cash flows arising from operating activities to net income incase a direct method is utilized (Australian Accounting Standards Board 2007).. Computercorp Ltd. has adhered to this requirement since it has since it has reconciled its cash flow from operating activities as shown in its note 24(a) to the financial statements (Computercorp 2009). Cash flow is supposed to be reported in gross basis. However, cash flows which reflect the activities of a customer and cash flows for which the turnover is quick, maturities are short and amounts are large are reported in net basis. Computercorp Ltd. used gross basis in valuation of its cash flow. There were no elements requiring use of net basis of valuation as required by the accounting standard. Besides, the standard requires that total cash flows resulting from disposal of subsidiaries to be presented separately in investing activities class. Computercorp adhered fully to this requirement since it reported disposal of a subsidiary as an investment activity. Moreover, an entity is required to disclose the amount of significant cash and cash equivalent accompanied by a commentary by management team. Computercorp has satisfied fully this requirement since it has disclosed the value of cash and cash equivalents as at the end of the 2008 financial year. Based on the requirements of AASB 107, it is evidence that Computercorp has attained high quality in reporting its cash flow statement since it has adhered to all the requirements (Australian Accounting Standards Board 2007). Disclosures are sufficiently clear to be understood by a common user The AASB has established non-complicated accounting standards for preparing cash flow statements thus making disclosures in the statement clear to be understood by common users. For instance, the requirement to divide the cash flow statement into three major classes allows users to understand the statement more clearly. Besides, technical accounting terms are not mostly utilized in the cash flow statement. Common words which are well known are used to describe various elements in the cash flow statement thus requiring little or no interpretation. However, various elements need to be subdivided or their names changed to be clearly understood by the common users. Terms such as finance costs need to be replaced with easily understandable terms. Nevertheless, cash flow statement can be said to be the simplest financial statement which can easily be understood by common users especially when direct method to present operating activities is utilized. However, use of indirect method for presentation of operating cash flow is a bit more complex for common users. Generally, based on Australian accounting standards cash flow statement elements are disclosed in a clear manner which is easily understood by common users (Reading a cash flow statement 2007, p.202). Conclusion Both national and international accounting standard setters have a major role to play in interpretation and convergence of international accounting standards. The two bodies need the support of one another in order to succeed in their mission of proper interpretation and convergence of international accounting standards. Due to possession of different features, different entities in national and international jurisdiction need to have different accounting standards. Accounting standards have addressed the issue of different entities in terms of function and formation but the issue of different sizes of entities in accounting standards has not been fully addressed. The accounting standards for small and medium enterprises need to be different from that of large scale organization in order to address the issue of complexity and high cost of implementation. Based on AASB 107, Computercorp Ltd. has exercised high quality reporting standards of the cash flow statement since it has adhered to all the requirements of the standard. Cash flow statements disclosures are clearer to the common users as compared to other financial statement. The accounting standards do not require use of more complex terms which are not easily understood by common users. However, various terms need to be changed to make the financial statement clearer for common users. Recommendations 1. Both international and national accounting standard setting bodies should work closely in order to come up with effective interpretation and convergence of international accounting standards. 2. Accounting standard setters should establish different accounting standards for small scale organizations in order to reduce the complexity and cost of implementation. 3. Computercorp Ltd. should maintain its cash flow reporting style since it conforms fully to the requirement of Australian Accounting Standards. 4. Accounting standard setters should establish more effective standards which embrace use of simple terms which are easily understood by common users. References Ann, T & Philip, B 2007, ‘Achieving high quality, comparable financial reporting: A review of independent enforcement bodies in Australia and the United Kingdom’, Abacus, vol.43, no.4, pp.438-473. Australian Accounting Standards Board, (2007), Cash flow statements. Computercorp 2009, 2008 Annual report. Chris, C 2008, ‘Separate financial reporting standards for NFPs’, Chartered Accountants Journal, vol. 87, no.5, pp.22-24. Danuse, N & Hana, B 2007, ‘The possible transformation of international reporting standards (IFRS), for small and medium-sized enterprises (SME)’, Economics & Management, vol.1, no.1, pp.12-18. David, C 2006, ‘Relationship with national standard-setting bodies’, Accountancy, vol. 137, no.1353, pp.90-91. David, M 2007, U.S. SMEs Should Consider Commenting on IASB’s Proposal for SMEs, Financial Executive, 23(7), 18-19. Mary, T 2005, ‘Convergence and the implementation of a single set of global standards: The real-life challenge’, Northwestern Journal of International law & Business, vol. 25, no.3, pp.687-710. ‘Reading a cash flow statement’, 2007, Actionlists & Checlists Journal, vol.1, no.1, pp.202-202. Thomson, A 2004, Role of National Standard Setters and their Relationships with the IASB, Viewed on 30 July 2009, < http://www.iasb.org/NR/rdonlyres/E491E8EE-0233-4FD7-B407-C489768596AA/0/0409wo01.pdf>. Read More