The Challenges And Impacts Of Implementing New Accounting Standards

Background on Australian Accounting Standards

The article “The challenges of implementing the new accounting standard” emphasizes the challenges of executing the latest accounting standards. Organizations which are executing the new standards realize that the level of effort and likely changes which are influencing income specifically the largest item in the statement of profit and loss and line items in the balance sheet.  Collectively, these may change the financial status and future revenue of organizations influences their business models.  One of the most fundamental challenges is to provide solution conversing with these challenges, and other impacts to shareholders.  For instance, investors and analysts will want to know if an organization’s reported earnings profile is probably to change or stat the same, whilst regulators will want to know that the standards are being appropriately applied.

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According to assertions of Crawford, Helliar, Monk and Veneziani, (2014), the Australian Accounting Standards (AASB) refers to an Australian Government Agency which develops and sustains standards related to the financial reports pertinent to companies operating in the private and public sectors of the Australian economy. Further, Libby (2017), specified that accounting standards are implemented as one of the most compulsory regulatory systems for the preparation of general objective financial statements and auditing of the reports in most of the states across the world. With the help of this, the investors can easily assess the financial position of the company and the prediction of alternative in a different organization in various countries. Moreover, it also provides a significant method which assists the companies in the resolution of financial clashes of interest among the different groups in society. It is required that accounting standards should command the utmost possible credibility between shareholders, creditors, workers and public at large.

The most crucial challenge in the execution of new income standard is ascertainment of the manner of accounting total income at the execution date of accounting standard and going ahead (Bars and Bonator, 2018).  The same will determine when the organization has recognized the income, which is one of the most significant numbers in the financial reports given that it obliges profit. Furthermore, various rules and regulations are to be implemented in making accounting decision relating to revenue recognition, and the result might be a critical change to how the company is identifying the revenue currently (Wang, 2014). In addition to this, the implementing the revenue standard concerning the disclosure conditions is also considered as the challenge. The organization will be obliged to keep information regarding the parts of agreements in much more detail form that they earlier weren’t mandatory to track or that they might not entail in their financial reports due to market sensitivity (Hribar, Kravet and Wilson, 2014). Apart from this, the future challenges is that though organizations might find the new income standards have no influence on them, getting to that outcome could acquire a long period of time since it entails re-examining of agreements, solving technical problems and administrating stakeholders. Thus, it can be established that it is a significant issue which is required to be discussed in detail so that the management could resolve an issue relating to same.

Introduction to Accounting Standards

Another main challenge is the implementation of the lease standard. The reason behind same is evolvement of complex variants such as management of flow-down impacts on things like debt agreements, inducements to workers, dividend strategy, and thin capitalization and lease intercessions.  It is the outcome of significant alterations to assets and liabilities because the conditions of the new standard to bring every lease, which presently is not recognized in the balance sheet. Further, execution of these leases is also a challenge for the company as most of the firms will require a new lease accounting method in order to deal with the difficulties in the lease estimations. Subsequently, only mathematical calculation explanation will not be sufficient to compute the assets and related liabilities, impact on gain and loss (Bars and Bonato, 2018). Organizations will require determining that if there is a need to advance their methods due to the extended reporting conditions of the new leases standards and the additional information requirements. Moreover, the firm must take this as a chance to find a system that not only satisfies their financial reporting conditions but also satisfies functioning requirements around administrating their lease portfolio.

Ultimately, the alterations to the definition of a lease might result in agreements now being categorised as a lease. To make this assessment, organizations will need to recognise their agreements that could potentially consist a lease. The doing of same in reality will be difficult as organizations will have to attach agreements away in random filling cabinets for decades.  It’s a worth taking into account agreements with hundreds of pages and challenges as these might present where there is a need to pull out, such as dozens of pieces of details to compute the lease assets and liabilities.

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Organisations that encompass financial assets, that is, money is owed to them will require to integrate progressive information on credit losses (Bars and Bonato, 2017). Further, this is considered as a challenge since it will oblige organizations to assess the individuals from which they can get the payment of debt and who will not pay the amount of debt, considering future economic conditions. Chenhall and Moers (2015), asserts that particularly for banks this will be a major undertaking given the number of consumers they have and the fact that credits are one of the key products provided by them.  

In addition to this, another challenge relating to financial instrument accounting standard is  that it obliges the organization to compose much more disclosure in their financial statements. The information requisite might not be readily accessible and can need substantial time and endeavour to acquire (Bars and Bonato, 2017).  Moreover, anyone who has external debt is that, in the new standards, profit or losses relating to  loans that have been recognized as per new standard in the past have to report for in the profit and loss on the day that the new accounting standard has been in effect. The same will have an effect on earlier profits or losses  which can be carried ahead into upcoming years over the existence of the liability. The same implies that organizations with external debt have to adjust in retrospect that is adjusting the new set of financial statement to take account of profits and losses in the opening balances.  

Challenges in Implementing New Income Standard

Financial executives of an organization are required on a compulsory basis to be aware of the potential change in accounting standard. The best approach for dealing with an accounting standard is not to obtain information relating to the same but to assess the significant impact of the same on the organization. Big corporate have a practice of assessing the potential change in accounting standard in order to take appropriate action when the same is required to be implemented for accounting purpose in books of accounts. The webcast and other publication relating to changes relating to current standard setting and regular activities relating to same should be monitored on a continuous basis so that details relating to the impact of these changes on accounting could be ascertained. A robust procedure can be developed through a cross-functional team which is important for enhancing the confidence that the changes in accounting standard have been completely adopted and carried out in an efficient and effective manner.

For instance, as amended revenue recognition standard can have a significant impact on accounting of revenue. The same will also have an effect on information which is captured for recognition and disclosure relating to revenue. This will eventually result in attainment of additional information as new estimated and related methodologies will be applied such as selling price of product or services. Thus, the data or information will be analysed on the basis of requirement of new standards so that the requirement of same could be accomplished. These practices will provide great assistance in indulging changes of accounting standard while recognizing transaction in books of accounts

It can be concluded from the above discussion that the significant challenge of change in accounting standard has been faced by organizations since the introduction of IFRS (International Financial Reporting Standards). The same eventually results in various other challenges. Organizations must consider that execution of new standards as not just a compulsory exercise for their finance panel to deal with. As, it is also an opportunity for organizations to get a deeper understanding of some of the very significant factors of their companies, their revenue and consumer engagement procedure, the effect of financial risks and the instability this builds in their earnings profile as well as and the lever concerned in decisions of capital investment. 

The exposure draft is the proposal issued to the public for receiving the feedback from the public with respect to the proposed new accounting standard so that the before the standard becomes the law; the accidental impact can be minimized.  International Accounting Standard Board is the body which is established for the purpose of issuing the international financial reporting standard all over the world (Camfferman and Zeff, 2015). This board consists with the members belonging to the several countries and possessing the significant knowledge about the accounting, finance and auditing. Further International accounting standard board works under the international financing reporting standard foundation (Christensen, Lee, Walker and Zeng, 2015). The main objective of the developing the international financial reporting standard is to improve the public interest and acceptance of the same compliance norms in the whole over the world (Cheng, Green, Conradie, Konishi and Romi, 2014).

Implementation of Lease Standard

The international accounting standard board is proposing to bring out changes in the international accounting standard 8, which is related to the agenda decision. The board in its exposure announces the proposed changes in the accounting policies that consequences from the agenda decision.

The international accounting standard 8 is related to the Accounting policies, changes in accounting estimated and error. This standard defines that an organization can change in its accounting policies only if the changes required by the international financial reporting standard or the changes required by the law or the changes lead to the improvement of the effectiveness of the information provided in the financial statement of the company. Therefore the organizations cannot make the voluntary changes in the accounting policies, for changing the accounting policies, there must be the reason which is stated about.

Further, the proposed change is enabling the organization for the voluntary changes in the accounting policies, that effect from agenda decision; the board announced the proposed changes in the international accounting standard 8 with retrospectively (Overview of proposed IAS 8 amendments, 2018). Further, the changes proposed changes are concentrated on the cost-benefit analysis.  As per agenda decision by the IFRS interpretation committee, if the entity amends its method of accounting, it means it is the cost-benefit assessment by the company. however it the cost of ascertaining the cumulative effect of the change is greater than the benefit to the user of the financial statement then the retrospective impact of the new accounting policies will not be applicable. Apart from this board also announced the related guidelines for the application of the cost-benefit assessment in the standard.

Earlier in the year 2017, the board also issues the exposure draft related to the definition of the materiality. With this regards the board publish the proposed amendment in the IAS 1 and IAS 8. In the proposed definition of the materiality also includes the omitted information which can have the same impact, if included. Further, the in the term could influence also includes the potential impact. Further the in the user-term, the primary users of the origination included at the time of publishing the information.

The views represented with the comment letter empathize on the aspect that is non-presence of sufficient guidance within the IAS 8, for those that conduct the application of IFRS in order make a difference among the changes held in the accounting policies and assumptions. Further, the assessment of the Board is that the planned changes will not be able to offer better insights on the matter that the stakeholders are required to distinguish amid a change held in estimates or either in the accounting policy (Brown, Preiato and Tarca, (2014).

Challenges in Financial Instruments Accounting Standard

It is the regular requirement to assess the difference and consider the complexities to determine precise principles in the IAS 8. To this note, goals of supporting higher stability and improvising the accounting information accessible to the financial statement users are promoted.  However, a higher amount of reliance is posted on a single example in order to resolve an aspect, while challenges the issues clearly. It is commented in the appendixes present on other areas, in which it is believed that a good amount of clarity is required in such amendments in order to attain the goals of the Board has established to attain

The IAS 8, is further needed to clearly set the principles and standards meant for distinguishing amid an accounting policy as well as an accounting estimate.The planned amendments to the accounting policy are required to take into account in contrast with the proposed revised accounting estimates and the revised error as well. Along with this, the three key categories must consider all the situations while accounting is changed by a business entity for some specific matters. In the absence of clarified principles, it is not likely that the planned amendments will be able to offer proper guidance, and can result in stabilized accounting for others thereof, similarly, the changes and the amendments in regards with the inventory will be expected to be perceived as a rule. 

 The comments letter received by the European Financial Reporting Advisory Group (EFRAG) does not agree with the proposed changes made by the international standard accounting board in respect of the voluntary changes in the accounting policies in the international accounting standard 8.  The EFRAG recommend for the clarification between the accounting policy and the accounting estimate. Further, if the company makes the voluntary changes in the accounting policy then every company make the changes in the accounting policies as per their own requirement. Apart from the above, the comparison between the companies also not justified if the company make the changes in their own policies. Therefore from the above reasons, it can be concluded that comments letter can be interpreted as against the regulation.

Public theory of the regulation refers to the safeguarding the interest of the public at large. This theory is guided towards the enhancing the benefit of the public by controlling the destructive activities of the organizations (Ferguson, 2018). At present this theory became the major challenge in the world, because generally all the public company, private company are conducted the activities for their own benefit. This theory assists the better allocation of the limited resources for the benefit of the group of individual.  Moreover, the regulation serves as the establishment of the legal means by the socio-economic objective can be achieved (Grunig, 2017). Generally, the resources are then used by the market and the industries, and as per the public theory the industry should use the optimum resources in their business activities, but practically the organization does not fulfil this condition. The public theory was developed from the traditional concept that the officers are highly responsible for carrying out their duties without any partiality for the benefit of the public (Bryson, Sancino, Benington and Sørensen, 2017). However, by implementing the government regulations, the imperfect market conditions, unbalance market condition can be minimized.  Moreover, the public theory is the significant element of the benefit of the economy and concentrated on the maximization of the social benefit through the regulations; the regulation is the outcome of the cost-benefit analysis to ascertain the cost of the enhancing market operation significant than the amount of the improved social welfare.

Credit Losses Management Challenges

The private theory of the regulation described as the generally all the economic activities carried out by any person are for the benefit of their own, which may not consider the interest of the public at large. In other words, it can say that achieving the benefit for the self-regulatory interest at the cost of the public, known as the private theory of the regulation (Baron, (2014). Further, this theory leads to the reduction of the social welfare of the public by capturing the benefit of the self-interest group. The benefitted group may be the firm, consumers, unions and such other. This theory is based on the assumption of enhancing own interest without taking care of the public. Due to the existing competitive environment in the world, the public interest is often avoided by the industries.

Capture theory

This theory states about the changes in the regulation as per the requirement of the person who is affected by them. This theory contended that regulations are made for the benefit of the industries.  Further, the persons who get impacted by the norms, rules and regulations should be directly involved in the formulation and the designing of the regulations (Black, 2017).  As the rules are made for the requirement of the persons, therefore, there is sufficient involvement of the politician as well as the interested group of the people in the regulations. Further, the benefit of the theory may be positive or the negative. However, the capture theory is considered as the inclusive theory since at the time of designing the regulation it ensures about the involvement of all the stakeholders. 

References 

Baron, D. P. (2014). Self-regulation in private and public politics. Quarterly Journal of Political Science, 9(2), 231-267.

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Black, J. (2017). Critical reflections on regulation. In Crime and Regulation (pp. 15-49). Routledge.

Brown, P., Preiato, J., & Tarca, A. (2014). Measuring country differences in enforcement of accounting standards: An audit and enforcement proxy. Journal of Business Finance & Accounting, 41(1-2), 1-52.

Bryson, J., Sancino, A., Benington, J., & Sørensen, E. (2017). Towards a multi-actor theory of public value co-creation. Public Management Review, 19(5), 640-654.

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