Benefits and Costs to Adopt Ifrs

Benefits and costs to adopt IFRS

The requirement for all Australian reporting entities to comply with IFRS reflects the global momentum for consistent, high quality financial reporting (Wilson, 2003). Conversion to IFRS is much more than an accounting compliance issue. Undeniably, significant benefits can be derived from implementing IFRS.

Information costs to an economy can be reduced by applying the IFRS, especially as capital flows and trade become more globalized (Ramanna & Sletten, 2009). Therefore, it saves the hassles of capital market participants instead of getting familiar with all other accounting standards. Participants only need to prepare one set of accounting reports which is complied with IFRS. It will be easier for businesses to expand across the world through the adoption of IFRS.

In this way, not only the preparers incur lower costs and save the preparing time, but also the auditors and users of financial reports as re-casting is not needed anymore. Consequently, Australian will be more open to the world investment markets (Barrett, 2004), more capital would be attracted to the country itself. Furthermore, as financial reports can now be presented and audited using harmonized standards, it becomes more internationally comparable.

In addition, differing accounting standards around the world would certainly increase the cost of capital for companies regardless the operation place. As for foreign investors, level of uncertainty is very high due to different accounting standards (Australian Government The Treasury, n.d.). It is impossible for them to get familiarized with all the existing accounting standards. Hence, level of uncertainty can be reduced by moving the accounting standards to one set. It would be easier for foreign investors to make decision and comparisons as the financial statements are prepared based on the same standards. As a result, resources are more efficiently allocated, confidence level of investor will be increased substantially and cost of capital will be reduced (Australian Government The Treasury, n.d.).

Furthermore, by adopting IFRS, some existing gaps in Australian General Accepted Accounting Principles (AGAAP) would probably be filled. The classification of financial assets and liabilities was mainly presented in notes to the balance sheet. The classification of investment financial assets varied in clarity. In some cases it was not possible to ascertain the type of available-for-sale assets (AASB, 2009). A number of financial instruments will be reclassified, for instance, resetting preference shares. Instruments that are currently being classified as equity may be defined as liability.

In contrast, there are some drawbacks that will be faced by Australia when IFRS is adopted. First of all, there would be some loss of AGAAP guidance, for example, the new standards do not provide details on employee benefit accounting (AASB, 2009).

Moreover, financial reports would less its comparability as a result of introduction of optional accounting treatments (AASB, 2009). In this way, corporations would choose the accounting treatment which benefits them at the current situation. When accounting for post-employment benefit plans, 73 out of 200 companies recognize all actuarial gain and loss immediately and in full. Whereas, 54 of these 73 companies use the new option which allows them to include these items in equity rather than profit or loss; 8 of the 54 companies do not present the required statement of recognized income and expense (ICAEW, 2007).

Another significant disadvantage is the implementation costs of change from local GAAP to IFRS. Some study indicates that the smallest companies bore the proportionately greatest costs. The economies of scale is in consideration, even amongst larger companies with more complicated transactions where more sophisticated accounting policies are needed. It appears that small companies are less willing or not able to utilize internal resources and greatly dependent on external assistance. There is evidence showing that larger companies are more readily and prepared to embed accounting changes to reduce future costs (ICAEW, 2007).

Key policy decisions

There are a number of key policy decisions to be made by Australian Government. For example, the government has to decide