AASB 11/IFRS 11

Discuss about the Auditing and Assurance for IASB and AASB.

The current projects of IASB are convergence of its Accounting Standards with the US FASB. These accounting standards are handled by IASB and AASB on their top priority (Chartered Accountant, 2016).

The Australian Accounting Standard of Board (AASB) issue and review the new accounting standards after the completion of stage 1 of the project in 2011 May. In this paper we discuss the two standards released by AASB that is AASB 16/IFRS 16 Lease and AASB 11/IFRS 11 Joint Arrangements.

 IASB issued IFRS 11 in 2011 May and this standard is effective from 2013 January (Chartered Accountants, 2016).

AASB 11/ IFRS 11: AASB introduce AASB 11 that is joint arrangements on 1^st January 2013. This standard was included under section 334 of the Corporation Act 2001. The main objective of AASB 11 is to provide guidelines for financial reports made by corporations who have interest in the joint arrangements. AASB 11 applies on those entities which are under obligation to prepare financial reports under part 2M.3 of Corporation Act 2001 (AASB Standards, 2011). AASB 11 replaces the AASB 131 that is Interests in Joint Ventures.

IASB commenced its project of joint venture in 2004, and in 2005 IASB adopted this project with FASB as convergence project for short period. This project was commenced to resolve these two principle issues:

• Determine the accounting method in case of joint venture.
• Provide choice of accounting in joint venture. 

According to AASB 2011, joint arrangement is an arrangement in which two parties are under joint contractual obligations, and they can access joint control over the project. AASB 11 also defines these terms: 

Joint Operations: In this parties have parties are under contractual arrangement and have joint control regarding the individual assets and joint obligations for the individual liability. 

Joint Ventures: In this parties have parties are under contractual arrangement and have joint control regarding the net assets. Parties can recognize their interest by using method providing under AASB 128 that is Investments in Associates and Joint Ventures (Chartered Accountants, 2016). 

The accounting treatment for joint operations and joint ventures are different. In case of joint ventures equity treatment is applicable and for joint operations different rules of accounting are provided. AASB 11 provides different treatment of accounting for both the arrangements (Queensland Treasury, 2016). AASB 11 replaces the accounting standard AASB 131 that is Interest in Joint Ventures. AASB 131 provides three categories that are jointly controlled entities, operations, and assets, whereas AASB 11 replace these terms by Joint Operations and Joint Venture.

AASB 16/IFRS 16

The main objective of IFRS 11 was to remove the method of proportionate consolidation for the JCEs. They provide equity treatment for the JCEs. Following are effect factors of AASB 11/IFRS 11:

1. Effect on financial statements:

• Jurisdictions used different accounting methods.
• Effect of this accounting standard on current and new joint ventures, and on their financial ratios.
• This standard provides equity method of accounting for joint arrangements.
• This standard provides different accounting methods for joint operations and joint venture.
• IFRS 11 provide methods of accounting as per the type of arrangement used by the company (IFRS, 2011). 

Companies which are jointly under contractual obligation and use proportionate consolidation method have to change their accounting method. But they cannot automatically adopt equity method for accounting. Management of the company has to check the provisions of contractual arrangements and other facts before switching to equity method of accounting (Ernst & young, 2011). 

AASB 16/IFRS 16: IASB issue IFRS 16 on 13^th January 2016, which deals with the operated lease, and main aim of this standard is to capitalize all the leases on the balance sheet of the company. Whereas, Australian accounting standard of board applicable this standard on or after 1^st January 2019. This standard provides single accounting method for all leases. This standard provides:

• IFRS 16 does not recognize the operating leases.
• IFRS 16 provides that all leases must be capitalized on the balance sheet of the company.
• IFRS 16 removes the need of rental expenses showed in balance sheet in lieu of lease. All leases impose depreciation on the asset and interest incurred on the liability of lease.
• All the calculation related to lease property must be included in the calculation of present value.

It must be noted that these provision are not applicable on retail lease and retail lessees are not bound to capitalize the lease asset on the balance sheet, they can show the rental expense in profit and loss statement (IBDO, 2016). This standard is not applicable on: 

• Short term leases that is lease of property less than 12 months 

• Lease of asset which is of low value. 

Exceptions of this standard:

• Leases in case of minerals, oils and other non-regenerative resources.
• Assets which are biological in nature.
• Arrangements of service concessions
• In case of licensing agreement.
• In case of intellectual property licenses (AASB, 2016). 

IFRS16 replace the IAS 17 that is leases, and IASB work with the FASB on this standard. IFRS 16 is applicable from 1^st January 2019, and company can apply this standard before the 2019 but only if company also apply IFRS 15 that is Revenue from Contracts with Customers. IFRS 16 removes the classification of lease as operating lease and financial lease. IFRS 16 treat all the leases as financial lease and apply the same treatment on all leases. IAS 17 provide different accounting treatments for operating lease and financial lease, IFRS 16 remove this method and provide similar treatment on all leases and also remove the term operating lease from its ambit. IFRS 16 provide that all the leases are capitalized in the balance sheet, and show the asset as lease asset in the balance sheet. IFRS 16 also change the treatment of expenses related to lease in profit and loss account of the company. IFRS 16 remove the straight line expenses related to lease and provide that depreciation is charged on the lease asset and the interest incurred on the liability of lease (IFRS, 2016).

IFRS 16 keep the definition of lease as it is provided in IAS 17, but it provide new guidelines on application of the definition of lease (Sivantham, 2016).

GAAP and IFRS

Before discussing the answer of this question it is necessary to understand the term stewardship. Stewardship is derived from the word steward, which basically means affairs managed by the one person in place of his employer or a person who manage the property of another person. This term is used by many people in different ways. Usually it is used for the custodianship of asset. According to IFRS, stewardship is useful for the performance of management. Stewards are not only the custodian of the assets but they are also responsible to make the efficient use of the asset.

IFRS standards are not appropriate for the local authorities, and the reason behind this is very simple as accounting standards issued by IFRS are designed to provide information which is useful for decision making for the investors to buy or sale share of the company. IFRS does not take any other factor for financial reporting. UK GAAP provides accrual method of accounting and focus on the major transaction in the balance sheet to determine the actions required in that period of time. UK GAAP focus on stewardship, financial performance of the entity and action required at that time period. On the other hand IFRS focus on measurement of value at one point of time and compare that value at different time. IFRS give more emphasis to balance sheet and put the profit and loss account on secondary level (Murphy, 2008).

In case of local authorities, there are no investors and such authorities do not provide any return on investment. Local authorities do not issue any bonds or shares for arranging funds. On which factors IFRS establish standards are not present in the case of local authorities.

Therefore, we can say that IFRS is not providing appropriate accounting methods for local authorities. According to Murphy IASB is not acting in the interest of public they are just designed to provide benefits for their biggest sponsors that is big 4 companies.

IFRS give more importance to the disclosure requirements and basically provide standards on the basis of this principle (CIMA, 2009).

IFRS make standards by considering the investors point of view but in local authorities there is nothing to buy and sell. IFRS give importance to the investors and think that the financial statements are designed only for investors. Accounting standards issued by IFRS is appropriate for big companies not for local authorities.

GAAP and IFRS have many similarities also, but the main difference is already highlighted above. GAAP is better for local authorities as it mainly focus on the stewardship accounting and financial performance of the company (E&Y, 2011). 

Conclusion

Murphy said that IASB works only for big four companies and develop accounting standards for the large scale companies. Murphy further said that IFRS are developed for comparing the value at one point of time from other point of time, whereas GAAP focus on stewardship accounting, financial performance and requirement of correct action at point of time. Question arises whether the difference between GAAP and IFRS really matters or not, and whether IFRS only serves to the BIG four companies also.

And the answer of this question is yes, IFRS serves only big four companies and designed standards for the profit of these companies. Accounting standards of IASB is not appropriate for local authorities.

Many differences are there in the GAAP and IFRS which proves that IFRS are designed for large scale companies. GAAP provides very limited methods and guidelines to offset the assets and liabilities in the balance sheet. On the other hand IFRS provides detail matter and methods to offset the assets and liabilities in the balance sheet.

GAAP focus on the financial performance on the company whereas IASB designed standards after considering the importance of investors, and they provide standards which help the investors in decision making for buying and selling the shares of the company.

In GAAP system balance sheet always emphasis on balancing the total assets from total liabilities, and in GAAP balance sheet always presents the item according to their liquidity terms. In IFRS current and non-current assets are separately present and current and non-current liabilities are separately classified.

Therefore, it is said that IFRS is work for its biggest sponsors that is big four companies (Ponnam, n.d.; Smith, 2012).

We cannot say that IFRS are not completely appropriate for local authorities. In some cases IFRS is also working for public sector. PFI scheme accounting, lease accounting and derivative methods are those areas where IFRS provide many opportunities for public sector also. IFRS also reduce the long procedures and confusions. IFRS is accepted all over the world and provide a platform which is commonly used by the companies all over the world. Under IFRS standards common accounting methods are used by the companies which make easy for investors to compare the accounting statements of different companies in different countries, and also these standards are designed to avoid confusion in taking sound decisions by investors.

There are many multinational companies which have work place in different countries and they have to maintain their accounts according to the laws of that country, which becomes difficult for the investors to understand the financial reports of that company. IFRS provide consistency in the accounting and issue accounting standards which are accepted worldwide, because of which it is easy for investors to understand the financial reports and make sound decision (Smith, 2008). 

In this answer we determine the effect of IFRS standards on the local authorities of Australia. IFRS standards are issued and reviewed by International accounting standard of board (IASB). Australia already decides to adopt the IFRS standards for its profit making organizations or in other words for those organizations which need to report. Australian government adopt these standards publically and applicable these high quality standards in their country. In Australia there are two types of reporting procedure for financial statements that is Australian Accounting Standards and Australian Accounting Standards – Reduced Disclosure Requirements. IFRS supports first type of reporting procedure that is Australian Accounting Standards. These standards are adopted by Australia from 1^st January 2005. These standards are applicable on all the domestic companies in Australia (IFRS, 2016).

According to the government of Australia there are many benefits of IFRS standards such as these standards help in attracting the capital in the Australia, these standards reduce the cost of accounting procedures and it replace the deficiencies of GAAP that is AGAAP (AASB, n.d.).

After the adoption of IFRS standards by local government, it was expected that there are number of changes occurred in the financial reporting of the local authorities. Local government organizations are not aware with the procedure of IFRS standards. Because of adoption of these standards many process of accounting, presentation methods and other concepts are changed.

Many counseling sessions and trainings are held to these changes effectively. But application of IFRS standards was costly and time consuming procedure for local government authorities. Benefits of IFRS standards for local authorities are still questionable.

IFRS standards are applicable on all the sectors of Australia that means on public and private sector. These sectors work differently and their structure and procedure are different from public sectors. Therefore, applicability of same standards on both the sectors put question mark on the success of these standards.

Before the adoption of IFRS standards many people make comments that these standards are not appropriate for the small firms. AICD make statement that IFRS standards are not appropriate for smaller companies, especially in view of resources. ICAA also demand some sort of relief for smaller companies. It was found after the survey of 135 listed firms that more than 65 firms which are listed on Australian stock exchange have seen no change in their net income or equity after applying the IFRS standards. Only number of adjustments is increase after the applicability of these standards (Ahmed and Alam, 2012). Generally it was found that smaller companies and those firms which are not in major cities face management issue, cost issue and time issue after the applicability of these IFRS standards (Pilcher, 2009). In last we can conclude that adoption of IFRS accounting standards increase the detail level of total assets and liabilities and require more disclosures which is difficult to manage for the small firms in Australia (Trewavas, 2010). 

References:

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