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Implication of IFRS for Local Authorities

Discuss about the Accounting Theory for Implication of IFRS.

Richard Murphy in his article has raised the concern on the adoption of IFRS on local authorities. The concern is regarding whether the implementation of IFRS on local authorities is right or is creating a potential weakness. The statement written by Murphy is completely right as professionals in the field of accounting believe that implication of IFRS on local authorities is not justified. As per Murphy, international accounting financial standard is applicable for all transactions that takes place at local authorities but does not take into account some prominent items such as public funds entrusted and supply of services.  As per the IFRS standards, public funds entrusted and supply of services are not required to be recorded in the financial reports prepared by the companies (Moore Stephens IFRS, 2009). However, these both items are categorised as most important management activities of local authorities.  Thus, the statement given by Murphy is completely right in the sense that local authorities are small business entities that does not have high amount of public engagements. Therefore, it is not required to impose IFRS implications on local authorities. IFRS standards apply to the entities in the preparation of financial statements for facilitating investors to take decisions regarding the purchasing or selling of shares. As such, the local authorities are not traded on stock exchange and therefore they are not required to prepare their financial statements as per the standards of IFRS (Deloitte, 2013).

The investors are not interested in purchasing the shares of local authorities and thus the application of IFRS on local authorities does not make any sense. It is very difficult for local authorities to develop their financial reports as per the international standards of IFRS. Therefore, the restrictions of IFRS on local authorities should be removed completely so that local entities can develop their financial reports easily.  The decisions of IASB to impose IFRS on local authorities’ should involve implementing proper changes in IFRS standards so that it becomes applicable to local entities easily. The applications of IFRS on local authorities without implementing any change would violate the core management activities as IFRS does not have standards to measure items such as public funds stewardship and supply of services. Stewardship in financial statements indicates the value for money over a period of time while IFRS standards are used for indicting the value of money at an instant point of time (World GAAP Info, 2008). As such, there is no benefit realised on imposing IFRS on local authorities as it does not measures the transactions that occurred over a period of time. The core management activities of local authorities include public funds stewardship and supply of services that are not measured through IFRS standards. Therefore, the statement given by Mr. Murphy is completely right that there is no need for imposing IFRS restrictions on local authorities. However, if IASB need to impose IFRS on local authorities then it should make some changes on IFRS standards so that local authorities can easily develop financial statements as per the IFRS standards (Deloitte, 2013).

IASB and Big 4 Relationship

Internal Accounting Standards Board (IASB) has developed IFRS standards for the business firms that guide them in preparing financial reports.  These mandatory standards imposed by IASB have put burden on the business entities for complying with all the requirements of financial reporting under the new IFRS guidelines. Business firms are facing increasingly difficulty in maintaining their accounts in accordance with the new financial reporting standards. Thus, multinational corporations are often seeking help from the Big 4 accounting firms for maintaining their financial reports as per the IFRS standards (KPMG, 2003). Big 4 accounting firms provides help to the business corporations in handling all the requirements of recording the financial transactions as per the new financial reporting standards. However, there is increased concern that IASB is working only in the favour of Big 4 accounting firms and is not helping the business entities who are facing increasing problem in developing their financial reports as per the IFRS requirements.  There is on-going debate that IASB is not working in the interest of public and is providing advantages to Big 4 accounting firms. There are several reports in the context of IASB providing favour to the Big 4 accounting firms through implementing several complications in the financial reporting (Ernst & Young, 2012).

These complications are not necessary for the investors in order to analyse the financial information of the business organisations. As such, the multinational business corporations are offering large amount to the big 4 accounting firms for completing their procedure of financial reporting. Thus as such, IASB is believed to work in favour of Big 4 accounting firms through introducing complications in the conceptual framework that is to be followed by all the business entities globally for preparing their financial reports. The IASB after the occurrence of financial crisis in the year 2008 and 2009 has also imposed restrictions on local authorities to comply with the IFRS standards (Ernst & Young, 2012). IASB, in the year 2010, has made it mandatory for the local authorities to comply with IFRS standards although there is no requirements on these small entities to prepare their financial reports as per the IFRS standards, Local authorities does not have any public involvement and are also not traded on stock exchange and thus there is no requirements for these entities to comply with IFRS standards. The main objective behind the introduction of these requirements on local authorities was only to increase their complexity of business operations. The BIG 4 accounting firms are acting unethically as they are providing help to the business entities only for the sake of money. IASB role is being questioned on the entire context as it is helping Big 4 accounting firms to make money through enhancing the complications in the IFRS standards (KPMG, 2003).

Implementation of IFRS in Local Authorities of Australia

The implementation of IFRS on local authorities in Australia has both advantages and drawback associated with it.  The major advantage of implementing IFRS on local authorities is obtaining timely and proper financial statements that are relatively easy for understanding and analysing. The stakeholders of local authorities can easily access the information regarding the performance of these entities and thus it will promote accuracy and transparency in local authorities’ operational activities of Australia. However, the major objective of implementing IFRS standards on developing financial reports is to provide timely and accurate information to the investors for supporting their decisions regarding investing in the business firms (IFRS, 2013). The local authorities in Australia are not involved with public and investors do not basically invest in local entities. Therefore, the point of debate is that it is necessary to implement IFRS standards on local authorities for making their financial reporting more understandable. IFRS standards are mainly required to be adopted by the business firms to make their financial reports more understandable for the investors. However, with no interest of investors in investing in local authorities there is increasing concern that IFRS restrictions should not be imposed on the local authorities in Australia. Some people argue that IFRS standards application for local authorities is highly required for standardisation of accounting procedures (Leonard, 2010).

The IFRS standards are required to be adopted by the local authorities also so that their financial reports are prepared as per the common conceptual framework adopted by IASB. It will make their financial reports easy to be understood and accepted at international level and this is proving to be the main reason behind IASB imposing IFRS standards on local authorities also. However, IASB, in this context need to understand the fact that IFRS standards are mainly advantageous to be implemented only in the business firm that are traded on stock exchange and interact with public. The major disadvantage of IFRS standards on implementing in local authorities is that that the standards does not measure and report the core management activities of local authorities, that are, public funds stewardship nod supply of services (Ernst & Young, 2012). Thus, it does not provide any benefit to the local authorities on complying with IFRS standards. In addition to this, compliance of local authorities with IFRS standards increases operational cost for these entities.  The business entities developing financial reports as per the IFRS standards have to incur the cost of deposing the financial reports with government bodies. As such, the local authorities often find it highly difficult for bearing all the cost associated with accounting firms for performing the operations as per the IFRS standards. The local authorities does not have high profit margin and therefore they have to face large difficulty in incurring the cost that is to be paid to the accounting firms for complying with IFRS standards. Thus, in the context of all these discussion it can be stated that  imposing IFRS standards on the local authorities is not necessary and provides only limited advantages (Epstein et al., 2009).

References

Deloitte. 2013. IFRS 1 — First-time Adoption of International Financial Reporting Standards. [Online]. Available at: https://www.iasplus.com/en/standards/ifrs1 [Accessed on: 20 October 2016].

Epstein, B.J. et al. 2009. Wiley GAAP 2010: Interpretation and Application of Generally Accepted Accounting Principles. John Wiley & Sons.

Ernst & Young. 2011. UK GAAP vs. IFRS. [Online]. Available at: https://www.ey.com/Publication/vwLUAssets/UK_GAAP_v_IFRS_-_The_basics_-_Spring_2011/$FILE/EY_UK_GAAP_vs_IFRS_-_The%20basics_-_Spring_2011%20.pdf [Accessed on: 20 October 2016].

Ernst & Young. 2012. International GAAP 2012 - Generally Accepted Accounting Practice Under International Financial Reporting Standards. John Wiley & Sons

Leonard, B. 2010. Report and Recommendations Pursuant to Section 133 of the Emergency Economic Stabilization Act Of 2008: Study on Mark-to-Market Accounting. DIANE Publishing.

Moore Stephens. IFRS. 2009. [Online]. Available at: https://www.moorestephens.co.uk/IFRS.aspx [Accessed on: 20 October 2016].

World GAAP Info. 2008. UK FRS. [Online]. Available at: https://worldgaapinfo.com/uk.php [Accessed on: 20 October 2016].

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