Ifrs - Not Disarster but Imbarrassment

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.

 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