HI6025 Accounting theory and Current Issues: Adoption of IFRSs: A Critical Review-Case of Australia and Saudi Arabia
Assignment Specifications
Purpose:
This assignment aims at developing student’s ability to critically examine the usefulness of the financial reporting regulations to Australian reporting entities, namely the Conceptual Framework and the adoption of IFRSs. Students are also required to research on another country that has adopted IFRSs in the past 5 years. They will have to do research on relevant literature and demonstrate understanding and critical evaluation of key issues of adopting IFRSs such as the transitional issues, challenges and benefits, and recommend future directions to the national accounting setting bodies.
Required Task:
In the body of the assignment, students will have to critically discuss the following issues:
1. The relevance of the Conceptual Framework of financial reporting. How useful it is with examples to illustrate your arguments.
2. Compare and contrast the implementation of IFRSs in Australia and one other country of your choice. The second country must have adopted IFRSs for at least 5 years. For each of the two countries, discuss the following:
- reasons for the national accounting body adopting IFRSs and when it was adopted.
- transitional issues faced (within a year or two), with examples.
- what challenges were faced by reporting entities upon adopting IFRSs. (Do not discuss transitional issues here). Include specific examples of accounting standard(s) and discuss the issues that made them challenging/difficult to adopt, to support your arguments.
- what were the benefits of adopting IFRSs by reporting entities;
- the similarities and differences in the adoption of IFRSs faced by Australia and the other country you have chosen. Include what factors had caused the differences you found.
3. Based on your findings, do you think the adoption of IFRSs were successful in the two countries? Explain your answer.
4. Provide two recommendations to the national accounting setting bodies (incl. AASB) on ways to ensure the IFRSs continue to be relevant to users’ needs and to all sectors of the economy.
Abstract:
International financial reporting standards were implemented in Australia back in 2005, while recent standard was implemented recently in the kingdom of Saudi Arabia in 2017. Commonly speaking, both countries experience issues while implementing standards in SMEs. The accounting body in the Kingdom of Saudi Arabia provided an extension of one year to SMEs to implement these international standards. The Australian accounting body was also concerned because more than 25000 small and medium Enterprise is operating in Australia. That is important that an independent body should be formulated by the international accounting standard board, which can provide consultancy to these SMEs to make sure that there is no conflict with auditor Independence as SMEs will not be required to take consultancy from their auditors for implementation of IFRS.
Introduction:
This assignment has discussed the issue of international financial reporting standards or IRFS and takes it for implementation in Australia and the Kingdom of Saudi Arabia. The study comparatively investigated the implementation of IRFS in both these countries by analyzing the challenges faced by both countries, the advantages of implementing these standards in both these countries, related issues of implementing these standards in both these countries, and other related matters. IRFS was implemented in Australia back, and 2005, but these standards were implemented in KSA recently at the end of 2017. According to the directions issued by SOCPA, which is the organization for public accountants, it was mandatory for the public limited companies in KSA to publish their financial statements for the fiscal year 2017 according to standards under the financial reporting at the international level. As of 31st December 2017, approximately more than 180 listed companies were able to successfully implement these standards while formulating their financial statements at the end of 2017 (Ey.Com, 2017).
IRFS was implemented in the kingdom of Saudi Arabia in the last 3 years recently. Most of the corporations in the kingdom which are listed were required to issue their financial statements of 1st quarter for the year 2017 in accordance with IRFS. With the adaptation of international financial reporting standards by the companies in the kingdom, investors will now be able to comparatively analyze the financial statements of Saudi public limited companies with other international Companies listed in other stock exchanges around the globe. This will help to create synchronization among the companies around the globe and Saudi public limited companies.
Compare and Contrast the implementation of IFRS
SOCPA adopting IFRS:
There were several reasons behind the implementation of standards in the context of the kingdom by the organization, SOCPA. The accounting body of Saudi Arabia implemented these standards at the end of 2017 in the country. All small and medium-sized Enterprises or SMEs were needed to have their financial statements under the standards and principles set by IFRS, which are effective in 2018. This one-year gap was provided to SMEs as compared to public limited companies. One of the most significant reasons behind adopting these standards was to standardize the financial reporting of listed corporations within the kingdom with other multinational companies to attract foreign direct investment (IFRS.Org, 2019).
Compatibility is considered to be one of the most significant aspects of financial reporting to attract appropriate investment in the country. Another significant reason behind the implementation of these standards was to make sure that listed companies are following internationally established standardized accounting standards to generate internationally reputed financial reports. This would definitely increase the confidence of stakeholders in the economy of Saudi Arabia, which would be beneficial for the economic growth of Saudi Arabia in the future.
The accounting body of Saudi Arabia was of the view that the implementation of these international standards will help Saudi companies to improve their performance, and it will help them to achieve the best results with high-quality financial reporting standards. Most of the members of the board of directors of the accounting body in Saudi Arabia were of the opinion that these international standards should be implemented in Saudi Arabia. They were of a view that this is the time for Saudi Arabia to have a smooth transition to international accounting standards to positively boost economic growth (SOCPA, 2019).
AASB adopting IFRS:
The Australian body of accounting standards is the Australian accounting standard board. Australian accounting body implemented IFRS as of 1st January 2005 in Australia. One of the most significant aspects of implementing IFRS in Australia was to have uniformity among the financial reporting of Australian companies with the rest of the world companies. Most of the countries have successfully implemented these international standards in their respective countries. Australia is considered to be one of the most advanced economies around the globe, and it was important for Australian multinational companies as well as local companies to compete with other global companies. In order to compete with them, it was important to have comparable financial reporting.
According to the accounting body in Australia, implementation of international accounting standards would positively increase the relationship of Australian companies in the rest of the world as financial reporting for Australian corporations will make unified with other corporations in the world with the same international accounting standards. It will also help to improve the level of transparency and accountability among the Australian companies, which is one of the most significant objectives of the Australian accounting standard board (Australian Treasury, 2019).
Harmonizing the accounting standards in Australia with the rest of the world will help the Australian economy to attract foreign direct investment, and this decision will positively influence international investors who were already willing to invest in Australia. It will help to reduce cost investing in Australia as investors internationally will be there to have the analysis of financial statements of Australian corporations by simply sitting at their home or office due to implementation of standardized international accounting standards.
Transitional issues of KSA:
Saudi Arabia is a notable emerging economy due to which there are different multinational companies, public companies, small and medium-sized companies operating in the country. It was not possible for all of them to formulate their financial statements according to IFRS on short notice. In order to resolve this issue, SOCPA instructed that public limited companies in Saudi Arabia will have to observe standards of IFRS in financial statements in accordance with IFRS maximum until 31st December 2017 while small and medium-sized companies were given extra time of one year in order to formulate their financial statements in accordance with IFRS maximum till 31st December 2018. This initiative was taken by SOCPA by looking towards the capabilities of different sizes of companies in Saudi Arabia.
It was difficult to make it mandatory for small and medium-sized companies to implement IFRS in the formulation of their financial statements. To provide flexibility to small and medium-sized enterprises, SOCPA declared that they have the authority to either choose IFRS in the formulation of their financial statements or they can choose the SOCPA issued standards to formulate their financial statements. It was a massive challenge to assist small and medium-sized businesses in Saudi Arabia, keeping in view their future growth. To facilitate them, SOCPA provided them with such flexibility. Saudi Arabia’s economy has been struggling in recent years, so it was the basic objective of the government to increase the level of foreign investment in the country. IFRS application will benefit businesses and corporations present in the kingdom by increasing the level of foreign direct investment and will also increase the transparency level associated with financial reporting (Deloitte, 2016).
Transitional issues in Australia:
The Australian accounting body was concerned regarding the implementation of IFRS in Australia. It was mostly because there is approx. 20,000 to 25,000 small and medium-sized companies are operating in Australia. It would be practically difficult for them to implement these international standards in their financial reporting. It would make the transition to IFRS difficult for SMEs in Australia. In Europe, only listed companies have moved towards implementation of IFRS, while in the case of Australia, all companies have been required to move towards implementation of IFRS. This concern was a massive challenge for most of the members of the accounting body of Australia (Evans, 2005).
It is noted that Australian corporations rarely used internationally applicable and used standards, due to which it was difficult for the companies to implement all the standards in their financial reporting. Most of the companies suggested that implementation of IFRS would make things more complex during the initial stages as the standards are new for most of the companies, and some of them have been rarely used the companies in Australia. Another challenge was to provide appropriate training with cost-effective techniques to make sure that the companies are implementing IFRS properly according to the requirements of the standards. Another significant issue is auditor independence. Most of the small companies in Australia will be required to seek guidance and help from their auditor’s ineffective implementation of IFRS, but this is against the concept of auditor independence. Most of the small companies’ directors suggested that they will have an independent auditor issue in this regard. This will present the management of the company to take advice from auditors in relation to the implementation of IFRS.
Challenges for reporting entities in Saudi Arabia:
Different small and medium-sized companies are facing issues in the implementation of standards for financial reporting within the Kingdom. To be specific, telecommunication sector-related companies are facing significant issues regarding the adoption of IFRS. Accounting standard board at the international level issued IFRS 11 under a joint arrangement which will influence different entities and industries, specifically the telecommunication industry in the Middle East and Saudi Arabia. This standard will mostly influence companies in the telecommunication sector, specifically in emerging as well as developing economies. Under this standard, telecommunication companies in the Middle East and Saudi Arabia will be required to formulate a consolidated statement of accounts in case of joint venture-related activities. Due to this requirement, it has now become difficult and complex for the management of telecommunication-related companies in Saudi Arabia to formulate their financial reports (Alsuhaibani, 2012).
Most of the companies in Saudi Arabia were not considered well as a significant aspect, and they were not reporting them separately from intangible assets in case of any acquisition. Through the application of IFRS 3, companies in the kingdom are now required to property disclosed details related to Goodwill separately from other intangible assets on the statements of the corporation. According to this standard, Company in Saudi Arabia cannot calculate amortization for the Goodwill listed on the balance sheet; they will have to calculate the impairment loss for the Goodwill included in the balance sheet according to the requirements of international standards. Companies will take some time to adjust to such changes with the adoption of international standards.
Challenges for reporting entities in Australia:
Different types of companies in Australia are also facing different types of issues with the implementation of international standards to report financially due to strict and tough reporting requirements of the standards at the international level. IFRS 17 is related to insurance organizations. Insurance Organization in Australia is facing issues in the implementation of this standard because this standard enhances the importance of concepts like evaluation of learning organization, risk management, and asset-liability management. Before the implementation of IFRS 17 in an insurance organization, they were not concerned significantly regarding this concept, but with the implementation of new international standards, insurance organizations will be required to increase their focus on such matters (Kells et al., 2018).
Most of the insurance organizations in Australia are also having issues in the implementation of IFRS 9 while formulating their financial statements. Some of the organizations have started using this standard while formulating their financial reports, while most of the organizations have not yet started using this standard while formulating their financial statement, and some of them are still waiting for the influence of this standard on the financial statements of insurance-related organizations. It is important that appropriate training should be provided to insurance organizations in relation to the implementation of this standard in order to improve the financial reporting standard of insurance organizations in Australia and to resolve the issues of implementation of such standards in financial reporting (Trussell et al., 2017).
Benefits of Adopting IFRS:
As far as the benefit of implementing standards is concerned, organizations in KSA, as well as Australia, benefited significantly from the implementation of international standards. Despite different issues, the benefits and challenges of implementing this standard are far more significant as compared to the challenges. One of the most significant benefits for reporting entities and both countries’ work is that company was able to improve their financial information quality and were able to provide their investors with formed information to make their investment as well as economic decisions (IFRS, 2019).
Another significant advantage of implementing these standards for companies in Australia and Saudi Arabia was to improve the level of comparability under which financial statements of companies operating in brief countries could be compared with companies around the globe. It would definitely improve the level of foreign direct investment as investors will compare different financial statements of corporations operating in the two countries with the rest of the world.
Another significant benefit of implementing International financial reporting standards in any country is to help the ineffective allocation of capital. With the usage of trusted accounting language, management can definitely reduce costs in capital investment and can also reduce the cost related to reporting at the international level. It will improve the overall reporting quality and standard of companies operating on the income of Saudi Arabia and Australia. It will positively improve the investment making decisions of investors in these countries.
There are many other several benefits of implementing International financial reporting standards. It helps to improve the growth of the economy as it into the level of international business in the country. That has to encourage international investors to increase their level of investment, which eventually increases the capital inflow. By using standardized accounting standards, financial statements formulated are easily understood by the investors.
Different industries in the economy are able to increase the level of capital from the foreign Market by using a low cost of investment. It also increases professionalism associated with the formulation of financial statements as professional Accountants and auditors are required to formulate financial statements under the studied international level standards (Davitt, 2017).
One of the most significant advantages of implementing IFRS is that it reduces the amount of time required to formulate the financial statement. With the implementation of the standards, the organization will reduce the time as well as effectiveness and expenses related to the formulation of multiple reports. The organization will be required to follow a specific set of regulations, standardized reports will be formulated instead of formulating multiple reports. It will save time as well as paper and money for the organization in the kingdom of Saudi Arabia and Australia (Regoli, 2019).
With the implementation of the international standard, company operating in Saudi Arabia and Australia will be able to extend their business operations in other foreign countries. These standards will help the local companies to adjust to globalization properly. It will also help the startup businesses to have already formulated accounting standards that they can utilize to formulate their financial reports. It will save them the cost of consultancy associated with the formulation of financial reports (Regoli, 2019).
The similarity in the Implementation of IFRS:
One of the similarities which were faced by both countries during the implementation of the standards was small and medium-sized businesses. Both countries have a large number of small and medium-sized businesses operating domestically. With the implementation of the standards, the accounting body in both countries was concerned regarding small and medium-sized businesses as they will not be able to implement the standards in a short time. Due to this fact, the accounting body in Saudi Arabia provided extensive time of one year for small and medium-sized businesses to formulate statements of the corporation under the reporting standard. The accounting body in the kingdom suggested that SMEs can either select international standards for reporting in the formulation of financial statements, or they can continue with already formulated National accounting standards formulated by the kingdom’s corporations and their public accountants with certification.
Differences in Implementation of IFRS:
One of the most significant differences in the implementation of these standards in Australia in Saudi Arabia was the implementation of IFRS 17 and 9. Most of the insurance-related companies in Australia were facing issues in implementing the standards and formulating the financial reports. Insurance Company in Saudi Arabia comparatively did not face such issues in the implementation of the standards for the formulation of financial statements.
The success of IFRS in Selected Countries:
As far as my analysis in this assignment is concerned, I believe that the application of international standards in both countries was successful. It was difficult to implement these standards in the initial stages in both countries, but the issues were resolved with the passage of time. Most of the businesses effectively streamline their financial reporting under international reporting standards after implementation of the standards in selected countries.
Another significant factor for the success of IFRS in Australia and Saudi Arabia was that companies are able to follow already formulated accounting standards that are internationally recognized to formulate their financial statement. Both countries are looking towards increasing investment from foreign businesses and corporations in each country, and implementation of these standards has positively reported their objective of increasing FDI in both countries.
Recommendations for Saudi Arabia:
There are different techniques that can be implemented for bringing improvements in the overall level of international financial reporting standards. One of the most significant aspects is SMEs. It is important that the international accounting standard board should consider SMEs in relation to the implementation of international accounting standards. It is difficult for SMEs to implement these standards because they do not have professional staff for this purpose, and if they take help from their auditors, then it is against the basic principle of auditor independence which is not allowed by the international accounting standard. It is useful and appropriate for accounting standards at the international level to formulate a flexible solution for SMEs in this regard to make this transition easy for them.
Another significant recommendation for the international accounting standard board is to increase the level of awareness associated with professionals, regulations, and preparation of financial statements. The most employer does not have an appropriate awareness regarding the benefits and advantages which can be achieved with the effective implementation of international financial reporting standards. This knowledge gap can be eliminated by providing appropriate training to employers.
Recommendations for Australia:
It is also vital for these accounting standards to improve the conceptual framework of accounting and auditing in Australia to safeguard the public interest.
The international accounting standard board can formulate an independent body in Australia to monitor the implementation of the international financial reporting standard and make sure that they are being enforced properly. Independent bodies can also provide consultancy to SMEs to avoid any kind of conflict with the principle of independence of the auditor.
References
Alsuhaibani, A., 2012. The Expected Impact of IFRS Adoption on Saudi Arabia Based on Lessons from Other Countries: A Focus on the Telecommunication Business. Procedia – Social and Behavioral Sciences, 62(2012), pp.1190 – 1198.
Australian Treasury, 2019. Statement of Intent – The Australian Accounting Standards Board. [Online] Available at: https://treasury.gov.au/sites/default/files/2019-03/AASB_Statement_of_Intent.pdf [Accessed 16 September 2019].
Davitt, J., 2017. The 5 Benefits of IFRS. [Online] Available at: https://www.morganmckinley.ie/article/5-benefits-ifrs [Accessed 16 September 2019].
Deloitte, 2016. Adoption of IFRS in Saudi Arabia. [Online] Available at: https://www2.deloitte.com/jo/en/pages/about-deloitte/articles/on-malta/adoption-of-IFRS-in-sa.html [Accessed 16 September 2019].
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Ey.Com, 2017. IFRS adoption in Kingdom of Saudi Arabia. [Online] Available at: https://www.ey.com/Publication/vwLUAssets/ey-ifrs-adoption-in-kingdom-of-saudi-arabia/$FILE/ey-ifrs-adoption-in-kingdom-of-saudi-arabia.pdf [Accessed 16 September 2019].
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Kells, D., Courlas, S. & Chaput, D.R., 2018. IFRS 17’s transforming effect. [Online] Available at: https://home.kpmg/au/en/home/insights/2018/06/the-transforming-effect-of-ifrs-17-fs.html [Accessed 16 September 2019].
Regoli, N., 2019. 19 Advantages and Disadvantages of Adopting IFRS. [Online] Available at: https://connectusfund.org/6-advantages-and-disadvantages-of-adopting-ifrs [Accessed 16 September 2019].
SOCPA, 2019. SOCPA Project for Transition to International Accounting Auditing Standards. [Online] Available at: https://socpa.org.sa/Socpa/About-Socpa/SOCPA-Projects.aspx?lang=en-us [Accessed 16 September 2019].
Trussell, M.H., Byrne, F., Kölschbach, J. & Bleekrode, E., 2017. Navigating change Feedback from insurers on the frontline of IFRS 17 and IFRS 9 implementation. [Online] Available at: https://home.kpmg/xx/en/home/insights/2017/12/navigating-change-feedback-from-insurers.html [Accessed 16 September 2019].
