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?
the IASC may be built on shaky ground, in that there is little evidence to suggest that this necessarily will improve international product and financial relations for companies reporting under Australian requirements. Given the magnitude of the potential downsides relating to the integrity and the comparability of financial reports and reporting in general, Australian professional bodies and the law need to consider their options carefully.
(E) Legal system
The Accounting world can be divided into “those countries which have a ‘legalistic’
orientation toward accounting and those with a ‘nonlegalistic’ orientation” (Nobes et al.,
1997:8). The non-legalistic approach can be found in countries, which use common law. In common law countries, like Australia, Accounting does not depend upon law. Accountants (professional organizations) arrange accounting rules. Hence, it is the private sector, which determines Accounting and not the law (Choi et al., 2002). The task of the legal system is to give an answer to a specific case rather than to formulate general rules for the future (Choi et al., 2002).
The legalistic approach can be found in countries, which use the so-called code (or codified) law. In contrary to the common law, the codified law system needs to develop rules in detail for the Accounting and financial reporting (Nobes, 1994). This means “Accounting rules are incorporated into national law and tend to be highly prescriptive and procedural” (Choi et al., 2002:43). In these countries the role of law is to describe behaviour, which is considered to be acceptable in the society (Choi et al., 2002).
(F) Provider of finance
The three main sources for external capital are shareholders, banks and government (Hill,
1999). It varies from country to country, which of these three provides most of the financial capital to companies. In countries like Germany and Italy banks provide companies with capital. In countries like Australia, shareholders provide companies with capital. The government is the provider of capital in countries like France and Sweden. (Hill, 1999) This diversity of capital providers means that Accounting Practices differ in order to satisfy needs of capital providers. In the case of shareholder ownership, (e.g. in the Australia), information disclosure will be more important than in countries, where capital is raised from banks or governments. This is explained by the fact that in the latter countries information will be transmitted more directly. (Radebaugh and Gray, 1997)
It is impossible for Australian companies to inform each shareholder with its specific information needs, because they are a big and unorganized group. Therefore financial statements in the US and UK are “oriented toward providing individual investors with the information they need to make decisions about purchasing or selling corporate stocks and bonds” (Hill, 1999:593). The Accounting Practices in countries with banks as main capital providers have an interest to protect bank’s investment. This led to more conservative methods, which are characterized by overvaluation of liabilities and underestimation of assets (Hill, 1999). In countries where capital is provided by the government, Accounting Practices are oriented towards needs of governmental planners (Hill, 1999).
(G) High Initial Costs