Discussion on harmonization is started quite long time ago. Its impact on the countries economy is good or bad is the central idea of this essay. This essay is written specifically on the accounting standard used in Australia. This essay starts with introduction on various topics such as conceptual framework, IASB, Sacs then it discussed the issue of harmonization. Harmonization will have positive impact on the economy because it attracts overseas investors to invest in Australia. This essay covers difference between conceptual framework developed in Australia and IASB framework. There are given lot of difference such as treatment of non for profit entity is same as the public entity in A-IFRS. Reporting entity concepts and valuation of non current assets is also different in A-IFRS .AASB framework is more prescriptive in nature as compare to IASB. Changes made in SAC4 are given at the end like the issues of operating dates and transitional provisions.
Every country has economic activities. To measure these economic activities fairly and free form any bias accounting standards are necessary. So every country has specific accounting standards .in the context of Australia there are also accounting standards which are made by AASB. This essay tells about Australian accounting standards developed in Australia and also discuss the IASB (International accounting standards board). After that this essay made comparison between these two set of standards. These essays also gave their views about IASB standard should be followed or not. After that there is discussion about changes made in SAC4 in the year 1992 and 1995.
The purpose of this essay is to make comparison between Australian standards set by AASB(Australian accounting standard board) and Australian equivalent of IASB framework (International accounting standard board) .this report fed light on the topics like should Australia adopt these standards set by IASB and what are the long term results of adopting these IASB standards .this standard . There is also the discussion about changes made in SAC4 between 1992 and 1995.
Overview of the essay
In this essay there is discussion about conceptual frameworks and SAC1 SAC2 SAC3 SAC4 .then there is discussion about IASB and comparison between two standards. There is also a lot of discussion about changes made in SAC4 after that there is paragraph about implication of adopting international accounting standards. There is lot more discussion about harmonization of accounting standards.
Conceptual framework in Australia:
According to Belkaoui A. R., and S. Jones, 2002 Conceptual framework is a set of concepts that specify the function, scope and purpose of financial accounting. There are two types of frameworks one is descriptive and another is prescriptive. A descriptive framework is that which tends to explains present financial reporting practice on the other hand prescriptive framework attempts to develop concepts for accounting that should be there. Prescriptive framework seeks more changes in the accounting system as compare to descriptive framework.
In Australia conceptual framework has made progress in 1980 when six exposure drafts were released. These drafts have considered the issues like objective of the financial reporting qualitative characteristics of the financial report, definition and recognition of the assets and definitions and recognitions of the liabilities. These drafts are released at the same time. In 1987 two more drafts are added one is definition of the reporting entity and definition and recognition of the expenses. In 1990 SACs are released theses SACs are: SAC1 for definition of the reporting entity, SAC2 definition of general purpose financial reporting and SAC3 qualitative characteristics if financial information. In 1992 one more SAC, SAC4 was released which is for definition and recognition of elements of financial statements .these SACs are given in detail in the later part of this essay(Belkaoui A. R., and S. Jones,2002).
Merits of conceptual framework
According to Belkaoui A. R., and S. Jones, 2002 Conceptual framework is like a constitution for standard setting process. It is the concepts to define nature, subject, and purpose, of the financial report. it has many advantages to have a conceptual framework for than company for example when there is a conceptual framework implemented in the country then all business bodies follows that framework and so there is better communication between different business entities. Otherwise it is not possible if there is no conceptual framework in the country. The AARF (Australian accounting research foundation) has discussed many different benefits of having conceptual framework as follows all financial reports will be in consistent with others. Setting conceptual framework is also economical for the country. More advantages are given below:
Ð²Ð‚Ñž Those who made the framework are now more responsible and accountable for their actions .entities are now more accountable if they do not proved any disclosure or giving false information. CF provides a means of communicating key concepts to financial report to preparers and users, as well as providing guidance to reporting entities when no specific standards address a particular issue.
Ð²Ð‚Ñž Financial reports made by the help of conceptual framework are consistent and more in logical manner so that there is more understandability in the financial reports.
Ð²Ð‚Ñž Because standard-setters will have harmony on many important issues, the Development of standards for accounting will be more economical.
There are also some disadvantages linked with conceptual frameworks like development of conceptual framework is under the influence of the political power .so political power can divert the conceptual framework which is not always good. Conceptual framework is costly to develop. (Belkaoui A. R. and S. Jones, 2002)
Conceptual framework defines and discussed topics such a definition of financial reporting and definition of reporting entity. After that it tells about objectives, qualitative, and elements that should be present in the financial report. It gives suggestion and guideline on various issues such as techniques of measurements, basis of measurement. Conceptual framework is like a handbook that should be followed to make financial report. (Belkaoui A. R. and S. Jones, 2002)
The Australian conceptual framework was developed by AASB (Australian Accounting Standards Board) and AARF (Australia Accounting Research Foundation). The financial reporting council (FRC) decided that Australia would adopt international accounting standards along with SAC 1, 2, 3 and 4. then conceptual framework is in need because the conceptual framework is what that give understanding of various concepts to that is necessary to define the theme, intention ,nature of financial reporting. in 2001 when Australia adopted the IambÐ²Ð‚â„¢s recommended IFRS then discussion was began about can conceptual framework of Australia can work well in the IASB environment or not . AASB 1001 series and AASB5001 is made accordance with the conceptual framework .these statements are necessary for preparation of accounting reports according to A-IFRS standards.( Belkaoui A. R., and S. Jones,2002)
AASB Ð²Ð‚â€œstatement for preparation and presentation of financial statements
The Australian accounting standard board (AASB) has implemented the standards of international accounting standard board (IASB) for financial reporting after January 2005.
To AASB this framework deals with objective of financial reports, qualitative characteristics that determines the usefulness of information in financial reporting ,definition, recognition and measurement of the elements from which financial statements are constructed and concepts of capital and capital maintenance.( Australian Accounting Standards Board)
According to AASB this framework deals in general purpose financial reporting (GPFR) and it is for general need of the users .AASB has instructed to the companies to prepare financial report once in a year. Financial reports should have reports such as balance sheet, income statement, cash flow statement, statement of change in equity and notes. This framework applies to all companies, bossiness. (Australian Accounting Standards Board)
The users of the financial reports include investors, employees, lenders, suppliers, customers and government agencies.
According to AASB financial reports are to be prepared according to accrual basis of accounting and reports are prepared on the assumption of going concern which means entity has unlimited life.(Australian Accounting Standards Board)
Characteristics of financial reports
Report should be easily understandable and there should be relevant information in the report so that user can make quality decisions. Report should include all material information .financial reports should be neutral and complete because biased reports or omission of the martial information can affect the quality of the decision making of user (www.aasb.com)
Statement of the accounting concepts (SAC1)
SAC1 deals in definition of the reporting entity it is issued by AARF and AARB. The purpose of this statement of accounting is to define and explain concept of reporting entity .SAC1 gave the criterion that which entity is reporting entity and which is not. And this statement gives the guidance about to what extent there should be quality in the financial reports. This statement defines the reporting entity concepts .this statement also fed light on user dependency on Profit gives factors such as separation of management from economic interest, economic or political importance and financial characteristics that can influence the dependability of the user on the GPRF.SAC1 also discuss implication of application of reporting entity concept. (AARF)
Statement of the accounting concepts (SAC2)
This statement was issued by AARF and AARB .these statement is guidelines for general purpose financial reporting. The purpose of this statement is for financial reporting in public and private sectors. This statement defines various terms like accountability, compliance, financial position, financing and investing, general purpose financial report, performance, reporting entity. This statement has objective to provide reliable information to users. It covers all type of business and non-business entities like government departments, corporations, and other not-for profit organisation like church and charities. this statement identifies four types of users of general purpose financial statements .these are resources providers (Bank , investors , creditors , suppliers etc.) recipients of goods and services(consumers) and parties performing a review or oversight function(regulatory agencies, media, government parties etc). This statement gives emphasis on providing reliable and relevant information to users so that they can make solid and quality decisions. These statements make the companies and business and non-business sectors responsible to give true and neutral information to the users. this statement instruct business and non business sectors to give information about performance, financial position of the entity and give various disclosures relevant to common need of the user of the GPFR(SAC2 Ð²Ð‚â€œ AARF).
Statement of Accounting Concepts (SAC3)
SAC3 (Statement of Accounting Concepts) Statement is known as Qualitative Characteristics of Financial Information. The aim of this providing this statement is to recognize those qualitative characteristics that should be included in the financial statements. The qualitative characteristics are mandatory in the financial statement so that user can make quality decisions .investor demands return on investment .so investor only invest in the business when they feel that financial report has sufficient quality. So SAC 3 are basic guideline to insure that financial report is to be made according with those requirements. (SAC3-AARF)
Statement of Accounting Concepts (SAC4)
Statement of Accounting Concepts SAC 4 discussed things about Definition and Recognition of the Elements of Financial Statements The rationale of this Statement is to set up definitions for the elements of financial statements i.e. Assets, liabilities, equity, revenues and expenses and to give guidelines for their recognition in financial statements. Reporting about, revenues, assets, liabilities, equity and expenses in financial reports may be by the way of recognition or by disclosure in notes at the end of financial report. (SAC4 Ð²Ð‚â€œ AARF)
The IASB (international accounting standard board) has prepared this international accounting framework in 2001.it discuss the basic concept necessary for making general purpose financial statements. This framework has also given guidelines to resolve accounting issues if relevant fact has not discussed in the IASB framework. If accountant does not find any specifies standards they can use their judgement for a specific case. This framework defines the objective of financial statements and recognize necessary characteristics that make financial statement useful and discuss the basic elements of financial statements this framework is for general purpose financial reporting for users such as investors, employees customers, lenders, government etc. the objective of this framework is to provide users information about company like financial position of the company, performance of the company, change in equity etc. These characteristics are the attributes that make the information in financial statements useful to investors, creditors, and others. The Framework identifies four principal qualitative characteristics Understandability, Relevance, Reliability, comparability
Issues of harmonization of accounting standards
The issue of harmonization is being discussed from the long time ago. According to Wilson harmonization is reconciliation of different point of views .he refers this idea as more practical than standardization because standardization means adopting of other countryÐ²Ð‚â„¢s standards .this definition seems to be more realistic and this definition can be accepted worldwide. So Wilson takes harmonization as reconciliation of every countryÐ²Ð‚â„¢s objectives and then emanating of some barriers in this process of reconciliation. (Belkaoui A. R. and S. Jones, 2002)
Merits of harmonization of accounting standards.
If the country has no adequate standards it will be easy for such countries to adopt these standards opposite of developing their own standards because accepting IASB framework will reduce the development cost as well as their countries standards will meet the global benchmark of accounting standards .
If its companies wants capital in capital markets outside the country, then IASB framework make sense. overseas investors invest in another company only when there is harmonization of the accounting standard Because there will be cost involved in convert accounting reports according to other countryÐ²Ð‚â„¢s accounting standards this will increase the cost of raising funds.( Leo K. & Picker R,2005)
IASB framework can reduce the obstacles in communicating financial information to investors in other countries. Most countries cannot expect foreign investors, lenders, and financial analysts to know the country's accounting standards. (. Belkaoui A. R., and S. Jones, 2002)
Limits of harmonization of accounting standards
First obstacle to harmonization is that every country has their own tax systems which is not resemble with any other country. So harmonization cannot takes place completely because tax accounting methodology is different in different countries.
Other obstacle of international harmonization of accounting standard is that every country accounting system is made according to some political and economic goals .it is difficult to make single political ands economic system worldwide.
IASB framework may be troublesome for companies in developing economies or for small companies because IASB framework will be to complex for them. Adopting IASB framework can increase cost of making accounting statements of small companies. (Belkaoui A. R. and S. Jones, 2002).
Implication of accounting standards in context of Australia
Australia has adopted International Financial Reporting Standards (IFRS) in 1 Jan. 2005. The adoption of International Financial Reporting Standards (IFRS) in Australia has gone relatively smoothly and for the first time the country's financial reporting is in line with guidelines set by the global standards overseas. The accounting profession is working according to new standards and it's to the profession's credit that the high quality of advice it has offered to clients has been a pivotal factor in the transition. (Charles Macek., 2007)
The Financial Reporting Council (FRC) recognizes that the adoption of IFRS has posed some challenges, but these are being acted on by the FRC, which throughout the process has engaged with and will continue to engage with stakeholders. (Charles Macek, 2007.)
The financial reporting council recognized that for Australian business to remain competitive internationally accounting standards should be harmonized So that analysis will be more easier and ensuring that Australian firms could raise capital with less capital raising cost.( Charles Macek.) because has been adopted by more than 100 countries which includes Asia and Europe. Because IFRS (International Financial Reporting Standards) is more principal based and easy to adapt there is less difficulties to change from Australian accounting standards to IASB framework.
Adoption of international accounting standards can become catalysts to raise capital for the domestic business because investors across the country can easily read the financial statements of the Australian companies. Australia constitute only two percent of the world capital market so overseas investors has little incentive to understand the financial statement of the Australian countries. (JONES S. AND PETER W. WOLNIZER)
According to Charles surveys the satisfaction level of investors and business with regards to IFRS. IFRS find challenges as one of that is SME (small and medium based firms) and other is not for profit entities. SMEs account for 95 per cent of Australia's companies and, with more than two-thirds of those employing between one and four people; many have struggled with the added complexity and the increased cost of IFRS adoption. Indeed, many SME (small and medium based firms) have criticized the change, believing the cost of adoption far outweighed any perceived benefits. (Charles Macek, 2007.)
Discussion on SME and not for profit entities
According to Charles Macek AASB, is examining new accounting rules being studied by the International Accounting Standards Board (IASB), tailored specifically to SMEs. (Small and medium based firms). AASB is going to implement Ð²Ð‚?IFRS late Ð²Ð‚?in 2007 which will be easier to use which will have fewer instructions .this IFRS-lite will be for those firms that have less than 50 employees and turn over of less than 10 Euro. It will be suitable for Non ASX listed companies. IFRS Lite would be reliable for entities that do not have public accountability and yet publish general-purpose financial statements for users, such as banks, Lenders and creditors. (Charles Macek, 2007.)
Kevin Simpkins (New Zealand's former Deputy Auditor General) has written a report on AASB and raised a number of important issues, like the AASB's current approach to the setting of standards for the public and not-for-profit sectors, the need for one or more separate sets of standards, and options for better meeting user needs. He concluded that IASB standards are not suitable for not-for profit entities after consulted professional accountants and government bodies. (Charles Macek, 2007.)
Comparison of AASB framework with IASB framework
According to STEWART J. & PETER W. WOLNIZER, 2003 AASB some specific standard relevant to Australia on the other hand IASB issues standards for the whole world. In a philosophical way both IASB framework and AASB framework are same but at the primary level both framework are very different .the main difference between these two frameworks are issue of content coverage and strategic direction on important framework question. Statements of accounting concepts (SAC1-4) are more in detail and they are made for financial reporting in Australia. SACs are more prescriptive in nature than IASB framework. In Australian statement of accounting (policy no. 5) nature and purpose of statements of accounting concepts are clearer than IASB framework counterpart. There are also two types of difference in both conceptual framework .these differences are given below
Ð²Ð‚Ñž Reporting entity concept
Ð²Ð‚Ñž Application of framework to public and private sectors.
Reporting entity concept
Australian conceptual framework gave issues rules to different types of entities for preparation of general purpose financial statements and Australian CF (conceptual framework) has discussed things like which entity should follows the specific accounting standard .but in IASB counterpart this topic of reporting entity is not discussed . IASB did not discuss about which entity should prepare general purpose financial report. (STEWART J. & PETER W. WOLNIZER, 2003)
SAC1 (statements of accounting concepts) defines that only reporting entity should prepare general purpose financial reports according to set of standards .when external users are involved in the companyÐ²Ð‚â„¢s financial matters then there is necessary to make the GPRF. These external users includes investors, lenders, creditors, financial institutes, employees etc. according to SAC1 when there are no user of the financial settlements then it is not required to prepare GPRF . Private companies and family business does not require preparing financial reports. SAC1 also gives direction to find out if there any external user exits of the specific company. This criterion is based on the judgment like
Ð²Ð‚Ñž Separation of management from economic interest
Ð²Ð‚Ñž Political and economic influence of the entity
Ð²Ð‚Ñž Size of the entity
SAC1 also provided the reason for requiring many types of entities like partnership, government department, trusts to prepare GPRF because previously there is not such requirement for these types of entities to do that. AARF has set different standard for different government bodies. In the IASB framework there is no such rules for the government bodies to prepare GPRF.SAC1 is vaster in its approach than IASB counterpart. (STEWART J. & PETER W. WOLNIZER, 2003)
Conceptual framework for public and private sectors
Australian accounting standards are for both public and private sectors .there is not a Difference between public and private sectors reporting requirements according to Australian accounting standards. Its conceptual framework is for both public sector entities and NOT-for profit entities. Australian accounting standards are also applicable for not for profit entities in private sectors. AASB gave the reasoning that economic and operating characteristics are same for both types of entities. Because of this AASB CF needs same type of reporting for both types of entities. So AASB follows sector neutral approach for reporting requirements. (STEWART J. & PETER W. WOLNIZER, 2003)
But IASB is only for the profit entities. It does not consider not for profit entities. So under IASB framework Australian not for profit organizations are doing the same practice as public companies are doing. In other regions such as Europe application of IASB is not needed for not for profit organization. There is international public sector accounting standards (IPAS) are used for not for profit organization. (STEWART J. & PETER W. WOLNIZER, 2003)
The other difference is that Australian CF is more explicit on the issue of planned work program for the future development of conceptual framework which includes
Scope of financial reporting in future, standards enforcement, operational issues etc. these topics are not vastly covered in IASB framework. For example there is a difference of measurement between these two frameworks. IASB say that measurement should be done on historical cost basis of accounting on the other hand AASB approach is to use hybrid cost model as it consider hybrid of cost and market value approaches for measurement of an asset. (STEWART J. & PETER W. WOLNIZER, 2003)
Australian accounting standard said that provide all discloser. On the other hand IASBÐ²Ð‚â„¢s European counterpart does not need to provide all the disclosers. AASB 101, presentation of the financial statements Para Aus126.1 and 126.2 requires extra disclosure about money paid to auditor for audit and non-audit services are necessary in the financial reports but in the European counterpart it is not required to disclose amount paid to auditors. (Leo K. & Picker R, 2003)
For the valuation of the non-current assets like plants, land ,machinery AASB framework rely on cost and fair value method equally but IASB framework provide very less distinction between the two .in AASB CF non current assets are measured at present value but in IASB CF it is not done. . (Leo K. & Picker R, 2003)
Optional treatment exist in IAS(international accounting standard) for example in IAS 31 interest in joint venture entities may be according to equity method or proportional consolidation but in AASB transaction of the same type should be accounted for in the same way by all reporting entities. . (Leo K. & Picker R, 2003)
There is some difference in term as in AASB term entity is used in contrast with enterprise used by IASB. In AASB term asset revaluation reserve is used but in IASB asset revaluation surplus is used.
AASB some specific standard relevant to Australia on the other hand IASB issues standards for the whole world.
Changes made in SAC 4 during 1992 to 1995
According to Belkaoui and Jones, 2002 after the release of SACs AARF found that there are clashes in the principal between accounting standards and statements of accounting concepts. this is due to the fact that accounting standards are based on the historical cost mode and principals of matching and conservation but these principals are not considered in issuance of SACs .so companies starts to criticize SACs due to inconsistency between SACs and accounting standards .they found SACs are difficult to implement . It is also concluded that if SACs are mandatory, there will have to change accounting standard according to SACs point of view. so the problem of international comparability would occur which would be not good for economic development of the company .so on Dec. 1993 committee of ICAA(institute of charter accountant in Australia) and ASCPA(Australian society of certified practicing accountants) decided that SACs should not be necessary for accounting profession. AASB and PSASB (public sector accounting standard board) decided to made amendments in SAC4 to make it more practical. So they invited public comment on SAC4 in 1993. So changes were made in SAC4 these changes are descriptive in nature .the main changes in SAC4 are given below:
Ð²Ð‚Ñž The reissue of SAC4 does not include operative dates. The Boards believes that t operative dates are unsuitable for Statements of Accounting Concepts (SAC). The Statement is operative as a directions to the Boards in addressing accounting issues
Ð²Ð‚Ñž The transitional provisions were absent in the reissue of SAC4. these transitional provisions are necessary for adjustment of retained profit and accumulated losses when statement is initially .after reissue of SAC4 ,the transitional provisions are not
Ð²Ð‚Ñž Changes are made in commentary part which includes the narrowing of the liability classification .there is also given emphasis on reciprocal and non-reciprocal transfers in new SAC4. More detailed discussion about recognition of increase in asset are given in new SAC4 as whether it can be recognize as an revenue or addition of revaluation reserve.
Ð²Ð‚Ñž appendix were not there in the new SAC4.this appendix was a type of guide to use SAC4.this appendix was not consider to be appropriate to be used in SAC4.board said that accounting standards and AARF releases are suffice for this .
Ð²Ð‚Ñž new SAC 4 was made more descriptive and more attention was given on matching and periodicity issues (Belkaoui and Jones,2002)
in this essay lots of topics are covered such as issue of harmonization and implication of adopting international accounting standards and changes made in SAC4 .harmonization of accounting standard is beneficial for all countries .Australia has adopted international standards in 2001.in long term it will be beneficial for Australia as Implementation of IASB will be catalyst for fetching more investment in the country. There are many differences in A-IFRS and its European and Asian counterpart with respect to entities like not for profit organization, government entities. There is considerable difference in the context of reporting entity concept and valuation of non-current assets. There are also other differences that are discussed in this essay. There is also discussion about changes made in SAC4 between 1992 and1995.
Belkaoui, A. R., and S. Jones, Accounting Theory, Nelson, 2002.
Charles Macek., Ð²Ð‚?working through IFRS challengesÐ²Ð‚â„¢, Charter. Sydney: Feb 2007. Vol. 78, Iss. 1; pg. 20, 3 pgs
STEWART J. & PETER W. WOLNIZER, Ð²Ð‚?Harmonization and the Conceptual Framework: An International PerspectiveÐ²Ð‚â„¢, ABACUS, Vol. 39, No. 3, 2003
Leo K. & Picker R., 'Australian accounting standardsÐ²Ð‚â„¢, John wilies, 2005
Australian Accounting Research Foundation, Statement of Accounting Concepts No. 1, Definition of the Reporting Entity, AARF, August 1990a.
Statement of Accounting Concepts No. 2, Objective of General Purpose Financial Reporting, AARF, August 1990b.
Statement of Accounting Concepts No. 3, Qualitative Characteristics of Financial Information, AARF, August 1990c.
Statement of Accounting Concepts No. 4, Definition and Recognition of Elements of Financial Statements, AARF, March 1992, reissued 1995.
JONES S. & John, Ð²Ð‚â„¢the need for standardization of international accounting Ð²Ð‚?, touche Ross tempo, winter, 1969, p.40.
IASB framework viewed on 6-9-07