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Accounting Theory and Current Issues

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Introduction

This research study focus on the effects of the adoption of International Financial Reporting Standards on Financial reports of Government entities. It sheds critical light on the how the adoption of IFRS, tends to impact on “equities”, “profits”, “assets” and “liabilities of local government organizations in Australia. The rationale behind this study is the importance is the controversy surrounding the “accrual accounting” practice in the government sector. The accounting practice for “infrastructure and public assets” like roads, parks etc. follow the “accrual accounting” policy, which has been a source of controversy for the inability to adopt IFRS in financial reporting of government organizations (Pilcher and Dean, 2009).

International Financial Reporting Standard and its impact on financial reporting

IFRS is a complicated and archaic process that is not lucid and simple to comprehend and the discrepancies between accounting standards of different countries and IFRS for local government organization. (PricewaterhouseCoopers, 2008). The adoption of IFRS will affect the manner in which fixed assets are valued. IFRS standards imply on the valuation of fixed assets to be done on fair value rather than current value. The adoption of IFRS also affects the accounting treatment for lease of land and building and also treatment of pension plans etc.

It is noted that the infrastructure does include 90% of the assets that belong to the councils and in such scenarios, a transformation from Australian Accounting Standard Board (AASB) to IFRS reporting standard, could have a massive impact on the local government organizations’ performances located in Australia (PIlcher and Dean, 2009).  However, in 2004, one of the first countries to adopt IFRS was Australia, adopting IFRS standards for local government organizations and the compliance would take effect from 2005/06. Critics have believed that the introduction and adoption of IFRS would materially affecting financial performance and the quality of accounting for entities in Australia. It has been debated that the adoption of IFRS would lead to major changes in many current Australian standards and some minor alterations in other “reporting requirements” (Buffiniet al. 2005).

Adoption of IFRS by public and private sector organizations and impact of IFRS on local government organizations

From the view point of local government entities, the adoption of IFRS would thrust important and major changes to the manner in which these organizations presented their financial performance to the stakeholders of the company. Thus, it can be seen that there would be issues to adjusting to the change in the manner of financial reporting. The local government organizations, just like profit seeking organizations, they were sceptical of the impact of IFRS on the financial reporting of these organizations. The adoption of IFRS would lead these organizations to re-evaluate the concepts and methods in accounting practice, the alterations in “accounting processes and systems” and the different styles and formats required for presentation. In addition to this, the local government organizations were deemed to prepare for changes and would be required to explain the change to the councillors, staff and the public along with the necessary requirement for audit, and other review and monitor processes, prepare two sets of the “financial statements” and make sure they complete all paper work. All of this could be hectic for the organizations in the midst of their daily work.

As per the survey carried by the Director of Corporate Services, in almost all of the councils of New South Wales, in 2006, it was found that implementation and adopting of IFRS by local government organizations would be a costly measure and would also be time consuming as well (Pilcher and Dean, 2009). On careful study and research it was found that the adoption of IFRS in local government organization would result in an increase in the total liabilities, it would majorly decrease the equity and most importantly it would result in diminishing surpluses (Goodwin et al. 2008).

An important observation that was seen that for medium and small firms, the impact of IFRS on the net profit and market value, was positive, which was totally opposite for large firms. IFRs had a negative on the net profit of large firms (Beciset al. 2006). However, for local government organizations, the research findings and observation shave been rather negligible.

It was also seen that on close examination, the impact of IFRS on the decision making process for local government organizations was not discouraging. It was seen that “large councils could adopt IFRS, and adopt its standards and thereby initiate steps that would result in the development of organizational processes that could adjust and introduce the IFRS standards. However, the small councils were not appropriate to accept such changes and thus, it would not be feasible for such changes. The small councils would experience hindrance to their daily activities, if they adopted IFRS standards. In addition to it, it would also lead to exhaustion and draining of time and finance (Pilcher and Dean, 2009).

Adoption of IFRS by local government of other countries

The research study does throw critical light on the fact regarding the adoption of IFRS reporting style by local government bodies of other countries. The local government organization in United Kingdom, have made positive stance forward in adopting the IFRS. In Canada, as well, there have been positive results regarding the adoption of IFRS style.

Introduction and adoption of IFRS in Australia

The accounting standards of IFRS has been introduced and is applicable to all sectors that exist in the Australian economy. An implication of this is that these accounting standards are neutral to sectors. There is equality and no variability regarding sectors and the same standard is applicable to both government organization and also for non-profit seeking organization. It is seen that public sector organization and private sector organization are difference and such differences can be traced from their ownership and objectives and mission. Thus, an important question that rises is the suitability and feasibility of uniform accounting standards for different sectors.

It has to be seen that the Australian government consist of a three-tier government including state government, local government and commonwealth government. The public sector has implied on cash basis accounting in the past before the introduction and adoption of accrual accounting. The local government along with other public sector entities adopted the accrual accounting, along with the introduction and adoption of AAS. Since the IFRS has uniform accounting standard and there exist no demarcation between public and private sectors, the Australian Accounting Standard Board had to evaluate particular guidelines and additional notes that had to be included as a part of the adoption process. These steps and initiatives were important for removing duplication in accounting standards and also at merging “Government Financial Statistics with the International Financial Reporting Standards and thereby providing specific guidance. It is seen that adoption and introduction of IFRS in local government organizations was viewed as complex and difficult since these organizations have social goals to fulfil and also have complex arrangements along with the dominance of “infrastructural assets.”

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