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1. The CEO has forwarded to you an interesting article and requires you to provide her with a deeper theoretical understanding of the issues discussed so that she can fully engage in the lively discourse at an upcoming conference. 

2. The Senior Partner of the firm you work for has appointed you to a new role. It is now your responsibility to review upcoming accounting standards and provide a report to the partners on the proposed standard and the opinions of other industry players on the changes. 

Impacts of Changes in Australian Accounting Standards

1. This section of the report aims to present an analysis of the article entitled ‘Australian accounting standards in biggest shake-up since 2005’ for examining the theoretical insights of the paper as per the accounting theory and concepts. The article has mainly discussed about the impacts of changes introduced in the accounting standards of Australia on the business entities operating within the country. In this context, the article has mainly emphasized on the issues that have emerged before the Australian companies in context of implementation of new rules regarding measurement and recognition of revenue (Poljak, 2018). AASB (Australian Accounting Standards Board) have directed the business companies operating within the country to comply with the new revenue standards of AASB 15 for Revenue from Contracts with Customers. Also, there has been introduction of new standards of AASB 9 for the financial instruments. AASB 15 has replaced the existing accounting standards of AASB 118 Revenue and AASB 111 Construction contracts (Accounting News, 2018).

The new accounting standards has required the business entities to measure and recognize the revenue realized only if it satisfies the performance obligations of a contract. The most significant change that has brought by the new accounting standards of AASB 15 is to recognize revenue when it meets the performance conditions as compared to that of AASB 18 that recognizes the revenue with the use of estimated percentage of completion method. The business entities as per this standard new to identify each individual contract with customer for determining its performance obligations. This is followed by calculation and allocation of the transaction price to each of the performance obligations and recognize revenue on meeting the obligations specified. As such, the introduction of new standard has caused the increase in volatility in recognition of revenue.  This standard will aim to improve the comparability among the revenue recognition practices across entities and thus facilitating the decision-making process of investors from across the world (Impact of Accounting Standard Changes in Recognition of Revenue, 2017).

The accounting standards of AASB 9 has caused major changes in the ways for financial reporting of business regarding accounting for financial instruments. The new standard has provided a new set of accounting rules for monitoring the financial assets and liabilities and prescribed new set of hedge accounting rules. The new standard is also expected to have large implications on impairment of financial assets and is applicable to all entities across various industries and is not only limited to financial services sector. The major objective of introducing new hedge accounting rules through introduction of this standards is to depict the risk management activities of an entity across its financial statement by allowing more hedging instruments to qualify for hedge accounting (AASB 9 Financial Instruments - Understanding the Basics, 2017).  In addition to this, the article has also discussed about the changes brought by the new accounting lease standards of AASB 16 in the financial reporting process of Australian companies. The new lease standards of AASB 16 has directed the business companies to report majority of their operating leases on the balance sheet from 1 January 2019. The is done for increasing the transparency in the lease commitments of an entity by recognizing and reporting he lease in service contract that are not reported under the existing lease standards of AASB 17 on the balance sheet. There will be a large impact on the financial results of an entity as it will cause significant changes in the recognizing of the properly, equipment and car fleets that are not recognized under the balance sheet as per the existing accounting lease standard. The accounting of these financial items will result in accounting for right of use leased assets and liabilities that will have a major impact on leverage, return on capital and EBITDA outcome of an entity (Accounting News, 2018).

Introduction of AASB 15 for Revenue from Contracts with Customers

The new accounting standards are introduced by AASB to comply effectively with IFRS and to improve the quality of financial reporting across all its business entities. This is essential to comply with conceptual framework of accounting proposed by IFRS as per which a business entity need to present the financial information in an understandable, verifiable, comparable and timely manner. As such, the changes are introduced to enrich the quality of financial information presented to the stakeholders such as investors, creditors, lenders and borrowers by improving the transparency and accountability in their business operations. The standard requires the business entities operating within Australia to disclose additional information about revenue realized, financial instruments and leases and thereby facilitating the end-users to take accurate investment decisions. Thus, the adoption of these standards by Australian companies will improve integrity in their financial statements and make them more comparable in the mind of foreign investors. This will in turn lead to improved capital inflows from foreign investors leading to their sustainable growth by enhancing their international competitiveness (Poljak, 2018).

The need for introduced changes in the Australian Accounting Standards for protecting the interests of the end-users can also be understood by the application of accounting theories such as stakeholder and agency theory. The stakeholder theory ahs stated that business entities need to act in the direction of maximizing the value created for its stakeholders. Thus, all the decision taken by a business entity should promote the welfare of the stakeholders by protecting their interests. Also, the agency theory has stated that the major responsibility of an agent, i.e., the business managers is to promote the welfare of principal, i.e., the owners. Therefore, it is necessary for a business manager to adopt such rules and policies that aims to create maximum return for the shareholders and increases the profit realized by them. Therefore, the introduction of the new standards of AASB will help the Australian companies to create maximum return and value for the stakeholders by providing them enhanced financial information to take accurate decisions (Jones, 2015).

However, as stated in the article the Australian companies are facing larger issues in successful implementation and adoption of these accounting standards. This requires the business entities to adopt a new accounting model to improve the comparability of revenue recognition practices across entities and industries. There will be requirement of introducing new disclosures and have a large impact on the Key Performance Indicators (KPI’s) and the significant ratios influencing the share prices of reporting entities. There is also significant requirement of providing training to the accounting professionals so that they can comply successfully with the new reporting requirements of AASB (Stebbens, 2018). The business entities also need to cause large-scale changes in the accounting systems and processes and thereby consuming both money and time. The implementation journey of the entities to adopt new accounting standard is a complex process that requires their assessment at initial phase, designing and implementation phase. This will help Australian companies to successfully adopt the accounting standard changes through developing a framework that facilitates their easy implementation (Poljak, 2018).

Changes in Financial Reporting of Business with AASB 9 Financial Instruments

The assessment phase should involve determining the scope of the standards by analyzing the impact of the introduction of the proposed changes on key accounting judgements and estimates. This should be followed by designing phase that involves development of functional specifications for the preparing the changes in the accounting processes and systems. The last step is the implementation phase that involves testing the designed accounting system and processes for ensuring that they can successfully comply with the new proposed changes. The adoption of the new accounting standards will promote global comparability among the financial statements of Australian companies but at the same time has also presented numerous challenges before these companies as stated in the article (Poljak, 2018). The major challenge that the companies are facing in this context is to provide detailed information in the financial statement for meeting the new reporting obligations (The challenges of implementing the new accounting standards, 2018).

The lack of professional knowledge among the accountants regarding the impact of the new revenue standards on the accounting transactions also proves to be major obstacle before the business companies in this context. The complexities involved in calculation of leases and revenue as per the new standard can incur the companies significant time. ASIC (Australian Securities Investment Commission) has warned the business companies of Australia against the impact of the new standards on their reported results (Stebbens, 2018). As such, it is required that all CFO’s and directors of Australian companies need to place large attention for identifying the problems that they can faced with the adoption of the new standards. This will help them in developing effective solutions for them and minimizing their negative impact on the business operations. It can be stated from the overall analysis of the article that accountants need to place large emphasis on the impact of the new accounting standards for ensuring their successful implementation (Poljak, 2018).

2. About the exposure draft

On 20th June 2017, International Accounting Standard Board has issued an exposure draft to make amendments in the IAS 16: Property, Plant and Equipment- Proceeds before Intended use. This exposure draft is currently in last stage of discussion where board committee has provided advice on the staff’s analysis and also suggests next steps to be follow to make this project complete. The comment is invited on this exposure draft from all over the world so that detailed analysis can be performed before making proposed changes in the IAS 16 (Exposure draft, 2017).

Major issues covered in the exposure draft

It has been general practice by many of the companies to account differently for the proceeds that have been received from selling items produced during the testing phase of fixed assets such as property, plant and equipment and before they are use for intended purpose. This practice makes it difficult for various accounting bodies and investors to produce and compare the financial performance and financial position of the companies. In order improve to improve consistency and transparency IASB has planned to provide clarification and make required changes in IAS 16 (Alexander & Archer, 2008). Thus, exposure draft proposes the required amendment that restricts companies to deduct any proceeds from selling of items that produced during the testing phase of three main asset category. These are property, plant and equipment from the cost price of such assets while assets have been prepared for the intended use in the factory or office. Instead all amount received from the sale of items produced during the testing phase are required to be shown in the profit and loss account.

Changes in Accounting Lease Standards with AASB 16

The para 17 of IAS 16, has provided examples of various costs that are directly related to bring the assets (Property, Plant and Equipment) to the location and condition required for operating in manner intended by the management. In such examples, one cost is related to the testing of such assets whether such assets are working properly and cost of assets are being calculated after deducting the value of items that are produced during the testing phase. On para 17, IFRS interpretation committee has raised two questions that proceeds referred in para 17 is related to the items produced from the testing and whether entity deducts from the cost of assets the value that exceeds the cost of testing (Exposure draft, 2017).

To give effect to the proposed amendments, para 17 has been amended and para 20A, 80D and 81M have been added. The para 17(e) now includes the cost of testing and excludes the value of an items that are produced during the testing phase. The para 20A clearly mentions that any items that are produced during the testing phase of property, plant and equipment like inventories must be shown as stock and value received through sale of such stock should be taken to the profit or loss account. Para 80D provides provisions regarding the retrospective amendments of proposed changes in relation to the items of property, plant and equipment. The para 81N provides for the date from which such amendment must made applicable on all entities. This date will be decided during the enact time of proposed draft (Exposure draft, 2017).

The proposed changes in accounting standard IAS 16 has been made to address the problems faced in two main industry sectors (Petrochemicals Industries and Extractive Industries). The changes introduced in the IAS 16 will increase the transparency and consistency through restricting the entities to represent the items of property, plant and equipment’s at actual cost and talking the sales proceeds of items produced in testing to the profit and loss account. This amendment will also help in satisfying the recognition criteria of sales of inventory in income statement instead to deducting it from the cost of testing as defined in para 17 of IAS 16.

Views presented in the comment letters in relation to agreement or disagreement with the exposure draft

 Comments letters are invited from all over the world to present their views on the proposed changes in accounting standard IAS 16. The respondents are invited to answer the question on the proposed amendment IAS 16 that whether they agree with the board proposal on not reducing the proceeds from sale of items produced during the testing phase from the cost of assets and instead taking that sale value in the income statement. If respondent agree, why they agree and if not why. Also suggest the alternatives solution to solve this issue and why such alternative is useful. Many comment letters have been received from the respondents and among them four letters from different accounting background have been selected to make review in this section.

  1. Comment Letter 1 (PricewaterhouseCoopers): PricewaterhouseCoopers (PWC) is referred in as Big4 as they fall in top 4 accounting and auditing companies all over the world. As per the comment letter it can be said that they agree with the proposed amendments with clarity regarding how the related cost of producing the test items charged to the income statement and on this they suggested to add incremental word as follows (: “<...>, and the incremental costs of producing those items, <...>”. So as per the information provided in this letter PWC agrees with proposed changes in IAS 16 by the board (Comment Letters, 2017).
  2. Comment letter 2 (RSM International Limited): RSM International Limited is an international entity that deals in audit, tax and consulting services. RSM International has expresses it views on the proposed changes in the exposure draft and shows they agreement with such changes as suggested by the board. They further added that requirement to recognize the sale value of items after the deducting the cost of producing them in profit and loss account are in accordance with the applicable standards such as IAS 2: Inventories and IFRS 15: Revenue from the contracts with customers (Comment Letters, 2017).
  3. Comment Letter 3 (CPA Australia): CPA Australia is the government body of Certified Public Accountant. They represent the body of 160000 certified public accountants in 118 countries and after consulting with them they argued that they support the proposed agreements as suggested by the IASB in their exposure draft.
  4. Comment Letter 4 (Rhafael Larry Mauricio, CPA): Rhafael Larry is an individual and it is certified public accountant at Philippines. He clearly mentioned in the comment letter that proposed changes in the exposure draft will surely improve the financial reporting through simplifying and effectively removing the diversity in the treatment of cost of testing of PPE by different industries. As this amendment will impact only few industries such as extractive and petrochemical industries but will certainly bring consistency and transparency in the reporting requirements (Comment Letters, 2017).

Compliance with IFRS and Improvement in Financial Reporting Quality

Analysis of comments letter in relation to interpreted them as being ‘for’ or ‘against’ regulation

It has been seen in all the four comment letters that respondents agrees with proposed changes in accounting standard IAS 16 with more clarity to treat the cost of production of items and its sale value in income statement. The financial reporting regulations are described in conceptual framework and this framework requires all entities to follows the accounting standard that are applicable on them. The IAS 2 inventories requires to show cost of inventory in balance sheet and any sale proceeds must be reflected in the profit and loss account. To provide certainty and transparency IASB suggested required changes in IAS 16 that further helps to rectify issues pertaining in accounting standard IAS 2 and IFRS 15. So, it can be said that agreement of all comment letters with proposed changes are in favor of regulation and supports to improve the financial reporting requirements (Camfferman & Zeff, 2007).

Application of each of theories of regulation to the comments letters

The theories of regulation i.e. public interest theory, private interest theory and capture are meant to describe the contestation of respondents of comment letters in regards to the proposed changes to the accounting standard IAS 16. Public interest theory seeks the benefit and protection of public at large with best possible allocation of resources. Private interest theory is certainly relating to public interest theory as any changes in the accounting regulation by the IASB (Private Interest) will certainly impact the public at large (Public Interest). On the other hand, capture theory is type of government failure occurs when regulatory agency such as IASB provide certain regulations that favors class of people or industry. Based on evaluation of all the four comments letters it has been found bodies(respondents) like CPA Australia, RSM International Limited, PricewaterhouseCoopers and Rhafael Larry adhere to the public interest theory without prejudicing the private interest theory. All the respondents have not shown any private interest in changes suggested in accounting standard but they agree with board so that proposed can further improve the quality of financial reporting (Moosa, 2016).

References:

AASB 9 Financial Instruments - Understanding the Basics. (2017). Retrieved 19 September, 2018, from https://nexia.com.au/news/accounting/aasb-9-financial-instruments-understanding-the-basics

Accounting News. (2018). Disclosing the impact of new accounting standards. Retrieved 19 September, 2018, from https://www.bdo.com.au/en-au/accounting-news/accounting-news-june-2018/disclosing-the-impact-of-new-accounting-standards

Alexander, D. & Archer, S. (2008). International Accounting/Financial Reporting Standards Guide 2009. CCH.

Camfferman, K. & Zeff, S. (2007). Financial Reporting and Global Capital Markets: A History of the International Accounting Standards Committee, 1973-2000. OUP Oxford.

Comment Letters. (2017). Retrieved 19 September, 2018, from https://www.ifrs.org/projects/work-plan/property-plant-and-equipment-proceeds-before-intended-use/comment-letters-projects/ed-property-plant-and-equipment/#comment-letters

Exposure draft. (2017). Retrieved 19 September, 2018, from https://www.ifrs.org/-/media/project/property-plant-and-equipment/exposure-draft/exposure-draft-property-plant-equipment-june-2017.pdf

Impact of Accounting Standard Changes in Recognition of Revenue. (2017). Retrieved 19 September, 2018, from https://probonoaustralia.com.au/news/2017/07/impact-accounting-standard-changes-recognition-revenue/

Jones, S. (2015). The Routledge Companion to Financial Accounting Theory. Routledge.

Moosa, I.A. (2016). Good Regulation, Bad Regulation: The Anatomy of Financial Regulation. Springer.

Poljak, V. (2018). Australian accounting standards in biggest shake-up since 2005. Retrieved 19 September, 2018, from https://www.afr.com/markets/australian-accounting-standards-in-biggest-shakeup-since-2005-20180627-h11wur

Stebbens, P. (2018). Australian companies grappling with accounting standards shake-up. Retrieved 19 September, 2018, from https://newsroom.kpmg.com.au/australian-companies-grappling-accounting-standards-shake/

The challenges of implementing the new accounting standards. (2018). Retrieved 19 September, 2018, from https://www.accountantsdaily.com.au/columns/11786-the-challenges-of-implementing-the-new-accounting-standards

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