CompanyIntroduction to Accounting
Accounting is a vast domain and with time, many changes come in. In the current period, all nations of the world are focusing on the convergence of accounting standards. This is because if international accounting standards are implemented at a global level, better comparisons of financial statements will be made. In the report, the application of IFRS in government departments is discussed in detail. Factors due to which convergence is done in IFRS are also discussed briefly. At the end of the report, the extent to which IFRS is in the public interest is explained in detail
1. Overview of the current discussion
Convergence of accounting standards refers to the objective under which the main target is to develop a single set of accounting standards that can be used globally by all business firms. Currently, each nation has its own accounting standards, and the same are followed for preparing financial statements. However, there are international accounting and reporting standards that are also followed by a large number of nations across the globe. For a long time, demand has been raised concerning evolving common accounting standards that will be followed across the nations to prepare financial statements (Armstrong et al., 2010). In the past few years, several efforts have been made concerning the convergence of accounting standards at the international level. USA currently is working with the International Accounting Standard Board (IASB) to converge its GAAP (Generally accepted accounting standards). There are several factors due to which nations like the USA and Australia are focusing on converging their accounting standards with the same of other nations or with IASB. There is a common consensus among the nations that if accounting standards are converged, then it will be very easy to make a comparison of the firm's financial statements. In the current period, each nation has its own accounting standards. Hence, each nation firm records the book value of accounting items differently. Due to this reason, it becomes very difficult to make comparisons between varied firm's financial statements.
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Contact UsIt is a well-known fact that financial statements are greatly used by investors and managers to make business decisions (Kieso, Weygandt, and Warfield, 2010). It is a well-known fact that in the current period, investors are not making investments in securities within their nation's boundaries. They are making investments in securities in foreign nations also. For making decisions, they require firms' financial statements. If the accounting standards of the specific nation are not designed properly, the financial statements may reveal the wrong picture of the financial position of the firm. Hence, investors can make wrong business decisions. This thing not only applies to investors but to all stakeholders also the same thing is applied. Hence, it is very important to bring about a change in accounting standards. This is a fact because more and more nations are focusing on the convergence of accounting records.
IASB and FASB (US Financial Accounting Standards Board) have already taken remarkable action in this regard. It is a well-known fact that in many nations, USA GAPP, which is also known as generally accepted accounting principles, is widely used in many nations of the world (Hail, Leuz, and Wysocki, 2010). Apart from this, a large number of nations are also using IASB standards. Hence, if standards determined by the FASB and IASB will converge, then automatically convergence to a great extent will come into existence across the globe.
2. The rationale for the current discussion and why projects of convergence of standards are undertaken
In the current time period, a number of nations of the world are focusing on the convergence of accounting standards. It is very important to identify the reason why most of the countries of the globe are reluctant to converge their accounting standard at the international level. There are some of the reasons that are responsible for this kind of convergence and the same are discussed below.
Helping investors in making better decisions: In the current period, as mentioned above, investors are not limiting their investment within their domestic boundaries. They are making investments at the international level. For making prudent investment decisions, an investor needs accurate information and for same, he requires financial statements in which everything must be recorded and valued at a fair price or number. It is the convergence of accounting records that will ensure this thing. When the reliability of financial statements and reporting standards increases, investors will be encouraged to make more investments in securities, which will lead to the growth of the nation.
Reduction in cost of complying with requirements: As it is a well-known fact that accounting standards vary from nation to nation, firms prepare their entire business financial statements (Daske et al., 2013). But at the same time, the region also prepared financial statements. For example, IBM is an American company and it is operating its branches in India and other nations of the world. The mentioned firm needs to prepare financial statements country-wise. So, to prepare a statement for the Indian branch, it needs to comply with the requirements, which are accounting standards followed in relevant nations. It will need to hire an Indian accountant, which will increase its employee cost. Now if accounting standards converge, then accountants will do accounting for all or most branches of IBM. In this way, convergence of accounting standards reduces costs for the firm that are incurred to comply with the requirements.
Transparency in the accounting system and elevation in accountability All nations of the world are laying down stress on bringing more transparency to the firm's business operations. If there are similar accounting standards, then there will be more transparency in the firm's business operations (Horton, Serafeim, and Serafeim, 2013). Based on common accounting standards, firms' financial statements can easily be checked, and if they manipulate figures, such acts can be easily identified by the analysts. If there are common accounting standards, then it makes firms more accountable for accurately preparing financial statements. Hence, to bring more transparency to the firm's business operations and elevate their accountability, it is necessary to develop accounting standards that get accepted by all nations of the world across the globe.
Reduction in operational challenges for accounting firms: In the current period, many accounting firms come into existence, which, by taking records from the business firms, prepare financial statements for them. If there is convergence in the accounting standards, then the firm will not be required to employ individuals separately to prepare financial statements for the specific national company. This will reduce the financial cost of the firms. This is another reason why most nations want to converge domestic accounting standards with international ones.
TASK 2
(3) IFRS and public departments
Yes, I agree with the fact that failure to measure almost means a failure to deliver management terms. This is because if, by using IFRS, the financial statements of the government departments cannot be prepared or presented systematically, then it is possible that management does not receive the required information in a systematic way (Landsman, Maydew, and Thornock, 2012). Hence, decisions taken based on inaccurate information or financial statements that do not cover sufficient information will be wrong. I agree with this fact because if there is not a proper format in which accounts of government departments must be prepared, then anyone can manipulate the figures and corrupt them. Moreover, if there is no systematic procedure that must be followed to compute the values of the specific element of the financial statement, then also anyone can be involved in unethical practices. Hence, it is clear that IFRS does not require accounting for stewardship of entrusted public funds, and from my point of view, it is not good.
It can be observed that in the current period, some very strict rules and regulations are followed for preparing financial statements (Christensen et al., 2015). Chartered accountants follow rules and regulations to prepare financial statements but at the same time also they manipulate figures and no one detects their unethical practices. In the case of Toshiba, which is Japan's largest firm that operates in the computer industry, it was found to be involved in unethical business practices. Hence, in the case of public departments, IFRS will not require accounting for stewardship of the public funds. The case of Toshiba reflects that there is a very high probability that individuals may manipulate figures for their benefit. Hence, it is very important to prepare separate guidelines for the government departments from the side of IASB so that chances of fraud and misrepresentation can be minimized at the workplace. It can be seen that inaccurate or wrong sets of information are always very dangerous for government departments. This is because lots of decisions, like the funding that will be made to the specific department and the amount it will invest in specific small and midsize projects, are determined based on information furnished by its financial statements. If these accounting records are prepared in the wrong way, then they will not reveal the actual condition of the government department and wrong business decisions will be made by the stewards (Ahmed, Neel, and Wang, 2013). This makes it important for the relevant entities to ensure that there are relevant and sufficient guidelines that are followed for preparing financial statements of the government department.
(4) IASB and public interest
The statement that IASB does not work in the public interest is wrong. This is because several factors act as evidence and reflect that IASB is working in the public interest. Some points that prove this statement are described below.
Stakeholders are the main audience of the IFRS and accounting standards. The reporting and accounting standards are prepared in such a way that individuals get an accurate overview of the firm's profitability and financial position. Stakeholders of the firm, whether they are investors or creditors, are part of the general public. IASB standards ensure that financial statements will be prepared accurately and will depict the true condition of the firm. Hence, the general public, based on financial statements that are prepared by following accounting and reporting standards, can make accurate decisions about protecting their interests. It can be said that IASB is in the public interest.
The main objective of the IASB is to prepare accounting records in such a way that they portray the economic reality of the business firm (Christensen, Hail, and Leuz, 2013). It can be said that IASB is developing accounting standards that help firms prepare financial statements in such a way that gives an accurate and clear overview of the firm's business profitability and financial position. Hence, the general public, which includes current investors, prospective investors, and creditors, can make the right decision based on financial statements that are prepared based on accounting standards developed by the IASB. It can be said that IASB is working in favor of the general public.
With time, a trust deficit is observed between the business firms and the general public. People have a common perception that firm are growing their business by doing illegal acts. Accounts are the mirror of any company and it is the only way by which it can be identified whether the firm was involved in any wrong act. International accounting standards ensure that firms will not be able to prepare financial statements at their discretion. Firms cannot conceal important facts and figures from the general public. This builds a trustful relationship between the firm and the general public. This thing is again reflected in the fact that IASB is not working against the interests of the general public.
(5) Do you think that IFRS must be adopted by the Australian local authorities?
IFRS must not be fully adopted by the local authorities of Australia. To prove this statement, some pros and cons of IFRS are described below.
Pros
It must be noted that IPSAS, which is also known as International Public Sector Accounting Records, is a set of standards that are used to do accounting in the public sector authorities (Horton and Serafeim, 2010). The standards that are prepared in IPSAS are based on IFRS, which was developed by the IASB. This means that some standards that are in IPSAS are taken from IFRS and some are developed according to the needs of the public sector authorities. If IFRS is adopted by the Australian local authorities, then it means that they are following IPSAS to a great extent. Australian local authorities can hire an individual as public accountants who have good knowledge of IFRS. This is because IPSAS's substantial portion is similar to IFRS. Thus, public departments can select an individual who already has good knowledge of IFRS, and by giving him training on provisions of IPSAS that are not encompassed by the former one, his best use can be made. (Barth et al., 2012) Thus, Australian local authorities do not need to spend a huge amount of time giving training to selected candidates. This is because he already knows lots of concepts of IASB that are part of IFRS.
Cons
The main limitation of IFRS is that it best suits business firms, not public sector companies. IPSAS is based on IFRS, which means that some standards of IFRS are covered by a former type of set of standards. It can be said that solely by using IFRS, accounting for the public sector cannot be done. This is because the calculation for the same thing is different in the case of IPSAS and IFRS. Hence, IFRS cannot be used for accounting purposes completely in the government departments and it is its major limitation.
It can be said that this limitation that is observed above in the IFRS is very big and cannot be used by the Australian local authorities. This is because IFRS is purely developed to prepare accounts in such a way that depicts the financial position and profitability of the business firms (IPSAS vs. IFRS: How do they differ? 2014). Public departments are nonprofit organizations and they do not have any relationship with factors like profit and financial position. Hence, even though there is a similarity between IFRS and IPSAS, the former cannot be applied in the Australian public sector.
CONCLUSION
Based on the above discussion, it is concluded that most of the nations of the world are focusing on the convergence of accounting standards. This is because by doing so, financial statements can be prepared systematically, and the same can be compared easily to evaluate the profitability and financial position of the one firm with rivals. It is also concluded that IFRS is appropriate for public and private sector companies, but the same is not good for government departments. This is because accounting standards are prepared in such a way that gives a better picture of the firm's profitability and financial position. Government departments work for the public and they have no relevance to profitability. Hence, IFRS cannot be used for accounting purposes in public departments. It is also concluded that IFRS is prepared in the public interest as it ensures that lots of valuable information will be available to the stakeholders. Stakeholders are part of the public. Hence, IFRS is in the public interest and it is not against the same.
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REFERENCES
- Ahmed, A.S., Neel, M., and Wang, D., 2013. Does mandatory adoption of IFRS improve accounting quality? Preliminary evidence. Contemporary Accounting Research. 30(4). Pp. 1344-1372.
- Armstrong, C.S., et al., 2010. Market reaction to the adoption of IFRS in Europe. The accounting review. 85(1). Pp.31-61.
- Barth, M.E., et al., 2012. Are IFRS-based and US GAAP-based accounting amounts comparable? Journal of Accounting and Economics. 54(1). Pp. 68-93.
- Christensen, H.B., and et al., 2015. Incentives or standards: What determines accounting quality changes around IFRS adoption? European Accounting Review. 24(1). Pp. 31-61.
- Christensen, H.B., Hail, L., and Leuz, C., 2013. Mandatory IFRS reporting and changes in enforcement. Journal of Accounting and Economics. 56(2). Pp. 147-177.
- Daske, H., and et al., 2013. Adopting a label: heterogeneity in the economic consequences around IAS/IFRS adoptions. Journal of Accounting Research. 51 (3). Pp. 495-547.
- Hail, L., Leuz, C., and Wysocki, P., 2010. Global accounting convergence and the potential adoption of IFRS by the US (Part I): conceptual underpinnings and economic analysis. Accounting Horizons. 24(3). Pp. 355-394.
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