Australian and International Accounting Standards Setting Bodies and the Application of AASB 107 and AASB 1031 - Case Study Example

Australian and International Accounting Standards Setting Bodies and the Application of AASB 107 and AASB 1031 Name: College: Course; Tutor: Date: Abstract International and national accounting standard setters play major roles in ensuring effective interpretation and convergence of international accounting standards. This paper aims at discussing the important roles played by national and international accounting standard setters in ensuring proper interpretation and convergence of international accounting standards. Moreover, the paper will discuss the notion that different types of entities need different types of accounting standards in order to minimize or eliminate complexity. Besides, the paper will focus on the quality and clarity of cash flow statement presentation by Blackmores Company. Introduction International Accounting Standard Body is focused in setting accounting standards which should be applied by all organizations across the world in order to enhance comparability, reliability and usefulness of financial reports. However, Australian Accounting Standards Board is focusing in setting national accounting standards which can be applied organizations operating in Australia. In this regard, differences among the accounting policies formulated by the two bodies arise thus calling for convergence of accounting standards. Nevertheless, the national and international accounting setting bodies play major roles in interpretation and convergence of accounting standards (Thomson 2004). However, there is need to develop different accounting standards for different organizations operating in different settings with different objectives in order to ease the complexity of the financial reporting. Moreover, business organizations are required to conform to conform to accounting standards while reporting financial statements such as cash flow statement. National and international accounting standard setters play a major role in ensuring that financial reports are reliable, comparable and useful to stakeholders. The Role of National and International Accounting Standard Setting Bodies in Interpretation of International Accounting Standard National and international accounting standard setting bodies plays a major role in interpretation of international accounting standards. To start with, the accounting setters are supposed to be vigilant on formation and implementation of international accounting standards in order to identify issues of interpretation which may arise. Due to difference in environmental settings, there will be inevitably issues of interpretation arising from international accounting standards which need to be dealt with to prevent them from hindering the major objective accounting standard setters (Mary 2005). Moreover, the national accounting standard setters assess an international accounting standard in order to determine the need for interpretation. Once the need for interpretation is identified, the national accounting setters requests International Accounting Standard Board (IASB) to address the issue effectively. However, in cases where certain issues affects only one or two jurisdictions, the national accounting setting accounting bodies are supposed to issue their own interpretations. However, they should liaise with IASB to avoid incompatibility (Thomson 2004). International accounting standards setting bodies are supposed address issues which are brought forward by national accounting standards setters concerning interpretation of certain accounting standards. Besides, the international accounting standard setters maintain a register of issues raised by national accounting standard setters or any other stakeholders of the international accounting standards. Maintain the issues register enables the body to produce effective solutions for all issues raised. The IASB is supposed to provide reasons for failure to handle any issue put forward by any international accounting stakeholders. Such a responsibility helps the national accounting standard setters to decide whether pursuing the issue will be of significance. Moreover, the IASB has the obligation to monitor the standards interpretation by the national accounting standard setting bodies to ensure that compatibility is not compromised (Thomson 2004). The Role of National and International Accounting Standard Setting Bodies in Convergence of International Accounting Standard Convergence of international accounting standards is of great importance since it facilitates comparability, reliability and usefulness of financial reports of organizations operating in the global market. National and international accounting standard setters have major obligations in ensuring the success of international accounting standard convergence. To start with, the national setters of accounting standards have the obligation to pinpoint and deal with national regulatory barriers to the adoption of the international accounting standards. Convergence of accounting standards can be slowed down or prevented by local regulatory barriers thus it is the obligation of national accounting standard setters to ensure that such barriers are addressed effectively. Besides, national standard setters have the role to encourage local regulators to contribute in convergence of international accounting in their respective regulatory grounds (Thomson 2004). Moreover, national accounting standard setters should act as a link for information flowing from government agencies, business organizations, politicians to IASB. Such an obligation helps to end non-technical debate and solve issues amicably. National accounting standard setters are also supposed to encourage their constituents to contribute in the IASB’s accounting standard setting process in order to make their views known and considered. In addition, the national accounting standard setters have the obligation to identify difficulties arising from certain accounting projects and pass the information to IASB at the early stage of the project (Thomson 2004). On the other hand, the international accounting standard setters have the obligation to avail information to the national standard setters concerning its activities and future plans. Besides, the international standard setters should provide adequate time for commenting on consultative documents to give national accounting standard setters time to prepare extra relevant material necessary to place the IASB documents in the conformity with national standards. The international accounting standard setters should also encourage critical analysis of its standard amendment proposals by providing a credible and open process that ensures that issues raised by national accounting standard setters are considered seriously. In addition, it is the obligation of international accounting standard setting bodies to avail project work to national standard setters and ensure that there is conducive environment for project development to open the debate. Once these obligations for national and international accounting standard bodies are undertaken effectively, convergence of international accounting standard will only be faced with few obstacles or none (Thomson 2004). Different Types of Entities Both Local and Around the World Need a Different Set of Accounting Standards Various regulatory bodies, institutions, organizations and even individuals have the notion that different types of entities both local and international need a different set of accounting standards in order to reduce complexity and provide enough prescription. This notion has been embraced by various international and local accounting standards setting bodies by coming up with different accounting standards for different accounting bodies. For instance, accounting bodies have developed different accounting standards for different entities based on their purpose of operation. Such a move has reduced complexity in accounting and provided adequate prescription of financial statements (David 2007). It is evidence that establishment of different accounting standards for non-profit making organizations and profit making organizations has played a major role in ensuring that the complexity of accounting standards is reduced and reliability of the financial statement is enhanced. Sources of funds for non-profit making organizations differ significantly from those of profit making organizations thus calling for different accounting standards for each type of entity. Generally, the objective of profit making and non-profit making organizations differ significantly. As a result, the two different entities have different stakeholders with different interests. One of the major aims of financial statements is to provide relevant information to all stakeholders of an organization for decision making purposes. Bearing in mind that different stakeholders require different information for decision making, development of accounting standards for each type of entity helps a lot in ensuring that the financial statements are relevant (David 2007). One of the major factors which have contributed to increased complexity of accounting standards as perceived by small scale business organizations is reluctance of national and international accounting setting bodies to come up with different standards for the small scale organizations. Adoption of some of the standards established by standard setters is too costly and complex for small scale organizations. In this regard, establishment of different accounting standards for small scale business organizations will play a major role in reduction of complexity of accounting standards (David 2007). Besides, one of the major objectives of accounting standards setters is to enhance comparability of financial statements of organizations. Comparison of financial performance of organizations is usually more relevant when similar organizations are being compared. In this regard, establishment of different accounting standards for small scale enterprises will not affect the element of comparability negatively. However, the difference of the accounting standards should aim at meeting all the objectives of accounting standard setters. One of the major factors which have led to difficulties in convergence of international accounting standards is the rigidity of the accounting standard setting bodies. To address this issue amicably, the accounting standard setting bodies should established tailored accounting standards to meet the needs of stakeholders of certain type of entity. However, the main objectives of enhancing reliability, comparability and relevance should be the guiding principles while establishing different accounting standards for different entities (David 2007). Blackmores LTD’s Quality of Disclosure about Cash Flow Statement Standard Australian Accounting Standard Board has established various accounting policies which guide the preparation and presentation of cash flow statement. These accounting policies can be utilized to determine the quality of presentation of Blackmores’ cash flow statement. Adhering fully to the standards denotes high quality presentation while failure to adhere to most of the standards denotes poor quality of cash flow presentation. According to AASB 107, a business organization is required to present its cash flow statement in three major sections notably operating activities, investing activities and financing activities (Australian Accounting Standards Board, 2007). According to the financial statements of Blackmores in the year 2008, the company adhered to this requirement by subdividing its cash flow statement into three major sections (Blackmores 2009). Besides, entities are required to use direct method or indirect method while presenting their operating activities cash flow. When an entity utilizes the direct method, major classes of gross cash receipts and payments must be disclosed. Besides, a reconciliation of net income and cash flow arising from operating activities has to be disclosed when an entity utilizes direct method (Australian Accounting Standards Board, 2007). Blackmores has utilized direct method in presenting it cash flow statement. The company has adhered to the standard subsections by disclosing major classes of gross cash receipts and payments such as receipts from customers, payment to employees and suppliers, income tax and interest paid. Moreover, the company has disclosed a reconciliation of net income with cash flow from operating activities in its additional notes to financial statement (35c) (Blackmores 2009). AASB 107 requires cash flows arising from transaction in a foreign currency to be recorded in a business organizations functional currency by using exchange rate between the functional currency and foreign currency prevailing at the date which cash flow statement is presented (Australian Accounting Standards Board, 2007). Blackmores has adhered to this standard fully since it has used the currency exchange rates prevailing at the date of presentation of the cash flow statement. Generally, the cash flow statement of Blackmores is of high quality since it has fully adhered to the requirement of the Australian Accounting Standards (Blackmores 2009). Clarity of Cash Flow Disclosures One of the major objectives of AASB is to enhance the reliability of financial statement. A financial statement can not be relied for decision making if the mode of disclosure is not clear to the common users. AASB has addressed this issue effectively by ensuring that the cash flow statement of entities is subdivided into three major sections. The subdivision of the cash flow statement makes it clearer to the common user thus enhancing reliability (Stewart 2008). The presentation of the Blackmore Company’s cash flow statement is extremely clear to the common users since it has adhered to the standards provided by the Australian Accounting standards. Use of direct method to present the cash flow statement makes it clearer thus meeting the needs of the common users (Myers 1994, p.72). Moreover, in the cash flow statement, the company has provided subtotals of each of three major sections. Providing subtotals for each cash flow section enables the common users to understand clearly which activities brought more cash to the company and those which led to large amount of cash outflow of the business organization (Climo 1996). However, effects of exchange rate changes on the balance of cash held in foreign currencies are a technical accounting phrase which is hard for common users of cash flow statements such as shareholders to understand. Nevertheless, the cash flow statement of Blackmores in the year 2008 appears to be clear for most of the common users (Alex, 2005). Conclusion Both national and international accounting standard setting bodies play major roles in interpretation and convergence of international accounting standards. Both accounting standard setting bodies need the support of one another in order to succeed in converging international accounting standards. Entities operate in different environments with different objectives thus calling for development of different accounting standards for different entities. Establishment of different accounting standards for different entities will help in reduction of difficulty experienced by organizations while adopting accounting standards. Blackmores Company has high quality disclosure of its cash flow statement since it has fully adhered to the accounting standards established by AASB. Moreover, the cash flow statement of the company is clear for common users to understand it. International and national accounting standard setting bodies have played significant roles in enhancing comparability, reliability and usefulness of financial statements. Recommendations 1. National and international accounting setting bodies should be supported by government authorities and entities stakeholders since they are playing a major role of ensuring proper interpretation and convergence of international accounting standards. 2. There is need for accounting standard setters to establish different accounting standards for different types of entities to reduce complexity in the accounting standard. 3. Blackmores Company should maintain its style of cash flow statement disclosure since it meets the requirements of AASB 107. 4. Accounting standard setters should embrace use of simple terms and phrases in cash flow statement disclosure to enhance clarity. . References Alex, F 2005, ‘The impact of mandated cash flow disclosure’, Journal of Business, vol.32, no.8. pp.1373-1396. Australian Accounting Standards Board, 2007, Cash flow statements. Blackmores 2009, 2008 Annual report. Climo, A 1996, ‘Cash flow statements for investors’, Journal of Business, vol.14, no.1, pp.3-16. 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. Myers, S 1994, Principles of corporate finance, New York: McGraw-Hill. Stewart, J 2008, ‘An evaluation of the decision usefulness of cash flow statements by Australian reporting entities’, Accounting & Business Research, vol. 25, no.98, pp.115-129. 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