This paper explores the role of accounting regulatory bodies in the interpretation of international accounting standards and also in the convergence of these standards. Adoption of these standards should result in increased comparability for Australian companies in the international market. The aim of implementing these international accounting rules was to make it easier for Australian companies to participate in offshore markets and also to encourage foreign investment. This has however not been the situation with a lot of Australian companies incurring losses following adoption of IFRS. The paper also discusses the notion that small companies need different standards due to the complex and costly nature of the current standards. In addition the paper reviews the efforts of an Australian company in adopting one of the new international standards of the AASB.
Introduction
The three major accounting regulatory bodies all have a role to play in the convergence of international standards and also in their interpretation for companies in Australia. With a goal of greater participation in international markets adherence to international standards cannot be ignored. This makes it a priority for Australian companies. Even with this importance, it is still necessary that the companies manage their accounting costs to ensure profitability. The adoption of the international accounting standards has been mainly due to the fact that most capital markets are fast becoming globalised. The major problem that comes with this adoption is the slow issue of interpretations which in turn slows down business. The temptation therefore is to have the AASB issue its own interpretations, this however would put Australia at risk of losing credibility with the international market.
The International Accounting Standards Board (IASB) has adopted interpretations and standards referred to as the International Financial Reporting Standards (IFRS) which were originally known as the International Accounting Standards (IAS) that were adopted by the IASB and developed them even further in addition to renaming them the IFRS. The IFRS dictates specific rules and also has broad rules that guide the accounting process. It is made up of various groups of standards. The IFRS are those standards which were issued by the board after 2001, while those issued before 2001 are referred to as the International Accounting Standards. Similarly interpretations issued before 2001 are referred to as the Standing Interpretations Committee (SIC) while the interpretations offered after 2001 are referred to as the Interpretations originated from the International Financial Reporting Interpretations Committee (IFRIC). Some of the principles on which the IFRIS is based on are outlined in the Framework for the Preparation and Presentation of Financial Statements. The IFRIC issues these standards and interpretations so that there can be greater uniformity amongst the companies in the global market irrespective of the country (Barret, 2004, p2). The IASB meets seven times in a year to issue interpretations on standards and rules stated in the IFRS. Most Australian national standard setters are of the view that these seven meetings in a year are too few and are the cause for delays. In addition it appears as though the IFRIC is reluctant to issue interpretations that are binding on the matters presented to them (Gettler, 2005, p1).
The Australian Accounting Standards Board (AASB) has a role to play in convergence of international accounting through referring identified technical issues to the IFRIC or the IASB. Once identified the AASB develops a project proposal which becomes the basis for assessment as to whether a project should be placed on the work program of the AASB. The AASB then discusses the work program papers drawing upon material from sources such as the IPSASB, the IASB and the New Zealand Financial Reporting Standards Board (FRSB) (Australian Government, AASB, 2007). In so doing the AASB, is enhancing the quality of its standards and also involving other international regulatory bodies making accounting in Australia more credible. Following a directive from the FRC, the AASB makes Australian standards that are equivalent to the the IASB standards. The main aim of the AASB standards is to prohibit fraud (AASB, 2005). Despite the fact that the FRC may give a strategic directive to the AASB, the FRC has no real involvement in the technical work of setting standards neither does it have the power to veto any of the standards set by the AASB, making the AASB an independent body.
The AASB has contributed to the convergence of international accounting standards by initiating the process of harmonising the international standards with the national standards early. This has resulted in a synergy of the two, making the adoption of the standards easier than if all the standards were being adopted all at once. The IASB standards have some standards similar to the Australian standards while others are far more complex (Financial Reporting Council, 2002).
The major role of the FRC is the provision of broad oversight for standard setting in Australia. This applies for all sectors from the private to the public sector including the not for profit sector. The FRC is involved in international standard setting by setting the priorities of the AASB, its budget, and business plans. The FRC is composed of a wide range of people with varying backgrounds such as directors from different corporate organizations and members of the accounting professional associations (Bowrey, 2007,p10). Senior members in public service are also part of the FRC, for example there is a First Assistant Secretary in the Finance and Administration Department (DOFA) (Bowrey, 2007, p10)The members of the FRC have been involved in several meetings to discover the needs of the community and organizations.
The FRC was the main body through which Australia’s financial contribution to the IASC foundation. The funds were sourced from funds available to the FRC contributed by the State, Commonwealth and Territory governments, the Australian Stock Exchange and the Financial Industry Development Accounting and the accounting bodies (FRC, 2002). Other functions of the FRC in relation to standard setting include the appointment of the members of the AASB, advising the government on the process of standard setting and development of international standards as well as the determination of the broad strategic direction in which the standard setting process should go (FRC, 2002).
There has been much debate as to whether the global rules for accounting should consider the different types of companies. This is in consideration of the small size companies. Jorge Voss is a professional auditor with ISAR, an intergovernmental UN working group on reporting and accounting. He argues that the rules have to be different for the small, big and medium size companies (Walton, Haller and Raffournier, 2003, p273). Small companies would have the costs of administration increased by adoption of the global rules which will in tum affect how competitive they can be. This is because the greater the demands for more precise accounting the greater the requirements for upgrading of administration and personnel. It also involves establishing greater financial control measure and highly advanced systems of processing information. These factors all contribute to an increase in costs (Walton et al, 2003, p274).
Other authors however see the problem differently and argue that the efforts toward more precise accounting may not necessarily impact the profitability of the company negatively. This is dependent on how well management can take advantage of the beneficial effects of the process, such as production of reliable accounting information (Small and medium sized entities, 2006, p5). Higher costs may not necessarily lead to a decrease in the competitiveness of a small company especially when the other companies in the market are involved in similar initiatives (Pagell and Halperin, 2000, p6). Another author argues that the discussion should not be on the cost of the new accounting initiatives to companies rather on the high cost of failure to modernize systems of accounting which are the main source of information during decision-making. The companies that do not modernize will eventually end up incurring more expenses whenever they seek accounting information causing their competitiveness to suffer (Pagell and Halperin, 2000, p6). Some analysts believe that application of international rules is difficult for organizations which do not have shares issued on the stock market. This may create inconveniences in the use of the international rules.
There has also been an argument that the international accounting standards are not relevant to small businesses as they create an information overload that could not be handled by small companies (Ramadhan and Joshi, 2002, p429). This has been disproved by literature from other countries such as Bahrain, where the small companies have adopted international accounting standards and not incurred as much cost as was anticipated. Those that had difficulty in maneuvering through the information that was provided by the new processes were assisted by external auditors who have been the main push factor for adoption of IAS, in the country. The small businesses report better financial control of their businesses ( Ramadhan and Joshi, 2002, pp435).
The IFRS reporting that has been adopted in Australia has resulted in changes in the practices of reporting especially in the regime of goodwill reporting and accounting. The framework of the IFRS requires a higher level of disclosure regarding the assumptions that have been taken so as to sustain the valuation of goodwill. The expected effect is that there should be an improvement in the transparency levels coupled with more information that would be useful in decision making. A review of disclosures found that the re was a kit if room for improvement among Australian companies with regard to goodwill disclosure. To begin with, the required disclosures were omitted on a frequent basis and also there seemed to be a lack of compliance with the technical requirements of the goodwill testing process (Carlin, Finch and Ford, 2007a, p4).
Before adoption of the IFRS, the practice in reporting goodwill was that the goodwill would be capitalised, then amortised against profit for a period of twenty years and this would be on a straight line. Goodwill balances were written where their worth had fallen below the carrying value. Practically, the balances were not usually written down and often the goodwill balances once they had been recognized were left to ossify (Carlin, Finch and Ford, 2007b, p6). This simple treatment has been controversial with some theorists arguing that goodwill is fictional in nature and it results from inadequate measurement of the true values of an organization’s assets (Miller, 1973, p56). Other authors do not see much of a difference between fixed assets and goodwill while others are of the view that both purchased goodwill and internally generated goodwill should have a legitimate place on the company’s reporting financial statements (Gynther, 1969, p49).
The AASB 136 is the standard that bears on goodwill disclosures and the process of testing the value of reported goodwill (AASB 136, paragraph 30). To determine the benchmark fair value, two methods may be utilised,the first being a disposal value approach while the second which is used more commonly in Australia involves estimation of the value that is in use (Carlin et al, 2007, p6). The discounted cash-flow approach is necessary for calculation of the asset’s value in use, AASB 136 has the requirement that this value be a reflection of of possible cash flows in the future from the asset (AASB 136, paragraph 55). The pre tax rate that is used should reflect the actual time value of money, this means the value should represent the current rate of interest in the markets (AASB 136, paragraph 56). The discount rate in this review incorporates the an asset-specific risk assessment. The rate is an estimation of the rate implicit for assets that are similar in transaction in the current market. This follows the common principle that every project undertaken by a company should have a financial asset of considerable risk paired with it. The AASB standard 136 also has the requirement that the rate of discount should not be dependent on the capital structure of the company or the how the company has financed the asset (AASB 136, paragraph 56. If a rate specific for the asset cannot be reached in the market, the company takes into account the the weighted cost of capital at an borrowing rate that is incremental (Ross, Westerfield and Jaffe, 2005, p55). When testing for goodwill, disparate rates are expected to be disclosed when the market risks are inconsistent across the the CGU (cash generating units) of the company.
According to the financial reports for Telstra, TLS, the disclosures related to goodwill are robust and in alignment with the AASB 136. TLS has identified 10 CGUs across eight of its business segments, with different reporting for each CGU, with the specific adjusted rates for where each CGU operates. TLS has also disclosed the growth rates for each CGU so that terminal values can be determined. The growth rates are based on the expectation of management regarding the long term performance of each CGU. The estimates for tax-required returns of 11.8 per cent for Telstra are well fitting with the discount ranges that have been disclosed by Telstra for its CGUs . This suggests that Telstra has not assumed a conservative attitude in its estimation of risks when calculating impairment of goodwill (Carlin, Finch and Nord, 2007). To test the sensitivity of goodwill risk a simple test is performed which decreases the growth estimates used for calculating terminal values by one hundred points while the discount rates for each CGU are increased by one hundred points (Carlin, Finch and Nord, 2007).
There is a range from 11.1% to 18.6% in the rates applied by Telstra to its CGUs. An estimate of cash flows by management for each CGU is applied over a period of five years resulting in an increase in goodwill of up to 8.5 per cent (21). Reducing the growth rate results in a reduction of about 4.7 per cent. When lower growth estimates and discount rates that are higher are combined across the board, it results in 13.2 decrease of of the value of goodwill (Carlin, Finch and Nord, 2007).
Conclusion
The evolution of international markets has been contributed to largely by the globalization and growth of operations of various companies. The globalization process has resulted in the revelation that accounting varies in application and content from one country to another. Accounting is like a language of business communication and the existence of difference creates a problem because of the economic impact of these differences. Some accounting differences may meet the national needs of the country and attempts at aligning them to an international pattern may lead to distortions of already present economic behavior. On the other hand, the differences may lead to missed opportunities, inefficiencies and distortions of economic behavior. This points to a need for use of international standards that will be uniform across the board despite the advantages that our own national standards may have. This is because for the business that hopes to conduct business across countries and therefore across cultures the need for these rules cannot be overemphasized. With the need for the rules having been clearly established, the regulatory bodies to support the process have to have their roles clarified with the independent bodies remaining so.
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