Financial Reporting and Accounting in Australia

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International Financial Reporting Standards (IFRS) are accounting standards that aim at establishing a common financial approach towards the operations of organizations around the world. The standards have been adopted by most of the nations while others have their own domestic standards that replace the IFRS. Australia is among the most recent nations that have adopted the IFRS along with Europe, Canada and Singapore among others. The accountancy profession faces a crisis in Australia as the number of accountants fall below the demand of accountancy services. The Companies Act in Australia necessitates corporate companies to prepare financial statements based on the requirements of the Australian Stock Exchange. The Australian Standards Board (AASB) is mandated with the task of providing standards for private, public and charity organizations. These standards are very important to regulate the accounting profession and ensure that reports provided by the organizations reflect the true financial position of the company.

Australian accounting standards compliment the international standards that regulate the accountancy profession worldwide. Where the Australian standards lack, the US GAAP steps in and provides direction on the treatment of the accounting entries. The powers to develop and amend the accounting standards are conferred upon the AASB by the Australian Securities and Investments Commission Act 2001. In 2002, the AASB under direction from the Financial Reporting Council began the strategic implementations required to facilitate the adoption of the International Accounting Standards Board (IASB). The AASB decided that the IASB were to take effect commencing January 2005 and organizations had to change their financial reporting systems gradually towards the approach of this date.

For quite some time, most of the Australian corporate entities are regulated by the Corporations Act 2001 which requires them to prepare annual financial reports. These entities are further regulated either by commonwealth or territory legislation in the preparation of their financial documents. Australia has three national accounting bodies which have the responsibility to ensure that their client entities meet the standards provided for by the AASB in the preparation of accounting reports. The presence of multiple legislations governing different corporate entities within a particular industry brought confusion in the determination of the financial positions of companies. The AASB resolved to adopt single standards that governed financial reporting among companies. Australian accounting standards had to scale to international heights as well as conform to international practices. This led to the streamlining of the accounting standards with those of the IASB referred to as A-IFRS.

Financial reporting under A-IFRS required the inclusion of comparative data in the release of current financial information. In adopting the A-IFRS, the Board of Directors and audit committees had to prepare adequately for their effect. Preparation efforts involved the development of a time frame within which the adoption process will be gradually implemented without having adverse impacts on the operations of the entities operations. Impact areas include requirements for additional capital expenditure, identification of impact on the production of the company’s mainstream products, performance indicators that inform stakeholders on the performance of the company, nature of internal control systems as well as skilled manpower to prepare statements according to the new standards.

The current draft for new accounting framework differs significantly from the existing framework especially in the recognition and measurement of company property. Qualitative aspects of accounting information include the ability of the information to meet the needs of the various users, project the future of the company, compare the organization’s performance with other organizations operating in the industry and ensuring consistency to facilitate comparison. With the A-IFRS, users of financial information will be able to understand the information as financial statements will have to reveal more of the company information, a provision that is non-existent in the current accounting framework. Under the new standards, corporate organizations are subjected to intense regulations that guide the preparation of the financial documents. For example English is identified as the basic language in which financial information is to be presented. The users will be able to easily inform themselves on the activities of the entity and make sound decisions pertaining to their underlying relationship.

The new Australian accounting standards strengthen the role played by auditors by ensuring their autonomy thus granting the financial statements adequate credibility. The standards state that financial information must be approved by an external auditor before being released to the public. This requirement was not stringent in the previous framework as the role of auditors in financial reporting was limited. Autonomous auditing of the company’s activities encompasses verifiability which involves the common measures undertaken by various measurers. Auditing in this sense serves as an ingredient to verifiability which is a qualitative aspect of financial inFormation.

Under the A-IFRS, companies are required to provide a comparison element in their financial reports. This means that previous accounting information should be provided together with the current accounting information. By doing this, users of the financial reports will be able to compare the company’s performance with previous performance and make a decision on the direction of the company’s current performance. Comparison of the company’s performance also enables the user to forecast the future of the company and making adequate decisions pertaining to their relationship with the company. Under the Australian GAAP, inclusion of previous financial reports in the current report was not addressed and therefore users had a rough time in comparing the previous performances with the current performance.

The strict regulations imposed by the A-IFRS will heavily impact on ‘creative accounting’ since the process of preparing financial reports will be more regulated. These new standards clearly indicate how organizations are to identify measure and access various accounting entries. By following the processes and procedures as stipulated by the standards, little room will be left for the manipulation of data which if successful will be noted by the auditor. The role of the auditor is to ensure the credibility of the financial information and under the new standards he is recognised as an autonomous party in financial reporting. Instances of creative accounting will be easily recognised by the users since they will be able to compare the performance of the company and confirm whether the provided reports are realistic or otherwise.

With the adoption of the A-IFRS, Australian companies were to cease preparing financial statements using the Generally Accepted Accounting Principles (GAAP) and adopt the A-IFRS. The international standards were more inclusive and detailed unlike the GAAP’s that lacked to address some accountancy issues. It is reported that the adoption process has made substantial progress such as harmonising the Australian accounting standards with international standards, the provision of quality client services through a much guided process and ensuring auditor independence within Australia. Areas such as the adoption of the standards in small business enterprises are under consideration to ensure they boost business activities as opposed to hindering them.

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