IFRS: Not Disaster But Embarrassment

IFRS: Not Disaster But Embarrassment

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IFRS: Not Disaster But Embarrassment
Moving from adoption to harmonization of Australian Accounting Standards with International Financial Reporting Standards, Australian companies have suffered embarrassment and bemusement in the process of understanding and implementing the new standards.

Problems arise in understanding the over-complicated relationships between IFRS, A-IFRS(Australian equivalents to IFRS) and original AASB standards. The distinction between them is not that much significant, but they do have some key differences that are essential to specific transactions and accounting operations. There is not too much trouble with the recognition of the differences between IFRS and AASB. The answer can be found in the textbook , "the only substantive difference between AASB and the corresponding IFRSs is the deletion of one of more alternatives permitted in the IFRSs, or expanding a standard to deal with matters not covered or excluded by IFRSs." The inconsistency of IFRS and A-IFRS is even tricky as saying "the devil is in the detail". The details of a demonstration can be seen in the contrast lists on the page3-5, which were found and copied down on the internet.

IFRS adoption affects many areas of financial reporting. The immediate and ongoing implications are not uniform across companies, but depend on such factors as the nature of business activities, balance sheets and capital structures. For some companies, the implications will be less significant, representing mainly a change in the presentation their financial statements. For others, however, the implications will be more substantive. They may involve changes to the amount and composition of reported financial performance and financial position, to the scope for future capital management, the ability of reporting systems to capture required information and changes to operational and risk management practices. The key issues arising from the adoption of IFRS and their prudential implications are outlined below.

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 Classification of equity instruments. AASB132 ‘financial instruments: disclosure and presentation' introduces a stricter definition of equity and, on initial adoption of IFRS, could result in certain preference shares and hybrid instrument currently classified as equity being reclassified as liabilities.
Measurement of financial assets and financial liabilities. AASB 139 provides scope for institutions to select specific classifications for financial assets and financial liabilities. Each classification has different accounting rules for measurement and reporting, including fair value or amortised cost. In particular, "available for sale" classification generally requires fair value measurement, with unrealized fair value gains and losses included directly in equity and transferred to profit and loss when realized. This new reporting flexibility has implications for reporting systems and balance sheet and profit and loss reporting. The implications for companies depend on the extent to which the measurement basis of financial liabilities is changed on adoption of AASB139.
 General provisions. Provisions for impairment will be accounted for in accordance with AASB139, which will replace AASB1044 ‘provisions, contingent liabilities and contingent assets'. AASB139 will require provisions for impairment to be recognized on an incurred and incurred-but-reported basis. This broadly means that provisions for impairment must be based on loss experience and only recognized after an event on which the loss experience is based has occurred. This is a departure from current practice under which general provisions may be recognized where impairment is considered probable.
Capitalisation of acquisition costs. AASB118 ‘Revenue' and AASB139 will limit the costs associated with the acquisition of financial assets, financial liabilities and investment contracts that can be capitalized. This limit will apply to direct incremental costs and may also change the pattern of amortization of these costs. This is likely to impact on the quantum and timing of profit recognition for investment contracts written by life companies in particular.
Excess of market value over net assets(EMVONA). The current AASB 1038 ‘life insurance business' requires all assets of a life company to be recognized at market value, with movements in market value to be recognized in profit and loss. In particular, AASB1038 requires any excess of the market value of a life company's investment in a life company subsidiary over the identifiable net assets of that subsidiary to be recognized as a separate asset and profit and loss item in the consolidated financial statements of the parent life company , as well as in the consolidated accounts any ultimate parent company. This ited is generally termed EMVONA.

It is better comparing the differences before and after the adoption of IFRS by illustrating exampled financial reports. I would like to take Quatas as an instance. The charts on page 6-7 display the financial reports of Quatas ended in Year 2005 and 2006. It is not difficult to find out that the format of Year 2005 remarkable differs from Year 2006, which is regulated by the IFRS. The classification of accounting items varies in Year 2006 from 2005 and more detailed with subtitles like ‘Cash and cash equivalents', ‘Trade and other receivables' and ‘Investments' in Assets, ‘Trade and other payables', ‘Financial liabilities' and Tax liabilities' in Liabilities. However, in the perspective of accounting practical and business operation, the key issues outlined in previous paragraph hold more water and may affect the company largely.

Positively speaking, companies could avoid the most common IFRS pitfalls. Some professional advices are given by analysts in the survey of companies failed in implementing IFRS in a proper way. Such as: "to have your high-level analysis in place with proper resource and project", "don't underestimate the disclosure issues- a lot of segmental information must be provided", "make sure you have enough time secured to cover the amount of research needed".
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