Australian Companies are required to adopt International Accounting Standards by 1st January 2005. What are the reasons for this move and what problems does it cause for financial reporting by these companies?
Before we touch on the reasons and problems on financial reporting by Australian Companies, I shall give a brief introduction of International Accounting Standards and its impact on Australian Companies.
Introduction
Under the strategy announced by the Financial Reporting Council (FRC) at its meeting on 28 June 2002 and publicly announced on 3 July 2002 (refer FRC Bulletin 2002/4, 3 July 2002, www.frc.gov.au), the Australian Accounting Board is obligated to work towards the full implementation of International Accounting Standards in Australia in respect of financial years commencing on or after 1 January 2005.
The objective for creation of a set of international accounting standards is premised very much on the assumed resultant enhancement to the efficiency of the capital markets and the consequent reduced cost of capital that would result from the existence of a set of globally acceptable accounting standards that resulted in high quality, comparable and transparent financial reporting. This is evidenced by the fact that the driving force behind the European Union’s decision to require EU listed companies to prepare their consolidated accounts in accordance with IASB standards from 1 January 2005 is desire of the EU to create a single capital market.
The fundamental to the success of the FRC 2005 strategy therefore is the ability of the IASB to have a set of high quality accounting standards in place sufficiently early so that companies in Australia are well placed to ensure their appropriate adoption on a timely basis.
Reasons for Australian Companies to adopt IAS
* Reductions in the cost of capital through the resolution of uncertainty;
* Relating to the interpretation and implementation of national standards;
* Administrative benefits arising from the ease of filing in multiple jurisdictions and the resultant simplicity in the development of common accounting systems in place of adjusting, reconciling and explaining different bases applied in different countries;
* Enhanced comparability and transparency of financial reporting requirements and credibility of the reported information;
* Facilitation of cross-border investment and fund raising and the removal of an impediment to a more efficient allocation of resources;
* Lower investment risk because it reduces an element of risk associated with understanding foreign financial reporting for investors and lenders.
* Listed EU Companies will comply with IAS, this is the main driving force for Australian companies to move towards IAS.
* Australian Investors gain as IAS are superior quality and give rise to high quality financial reports.
* High cost of reconciling accounts between international regimes for Australian companies before the introduction of IAS.
* Australia’s small capital market means we need to conform to attract international capital.
Reasons for Australian Users adopting IAS
From the standpoint of the users of financial statements (e.g. investors, banks or owner) one can see the following advantages. Investors, banks or owners are interested in obtaining information, which enables them to make buy/sell/hold investment decisions. We argue, that similar financial statements would make it possible for users of financial statements to make useful comparisons between countries and companies. This can be explained with the circumstances that similar transactions are accounted [next page]