Changes Between Aasb and Lasb

AYB 200 Financial Accounting Semester 2 2017

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Table of Contents

Executive summary2

Report3

References6

Appendix7

Executive summary

AASB’s key aspects include the objective of general purpose financial reporting, qualitative characteristics, the elements of financial statements, recognition and measurement. The IASB’s exposure draft proposes to include “stewardship” and “prudence” in its conceptual framework. Also, it revises definitions of financial elements and adds a guidance on derecognition. Adopting IASB into AASB conceptual framework has to be consistent with transaction neutrality policy, which means AASB should ensure that the conceptual framework is suitable for all sectors. IASB’s focus is on for-profit sector. If AASB can address issues related to not-for-profit entities, AASB could be entitled to adopt IASB.

An IASB exposure draft (ED) that proposes some revisions to its current conceptual framework (CF) was released in 2015. The development of IASB may contribute to an effect on the development of AASB. Adopting IASB in AASB CF is a significantly controversial issue. This is because the adoption of IASB can affect the way of Australian entities to prepare their financial reports. This essay will analyse crucial aspects of AASB and changes of IASB. It will be divided into three sections: an overview of AASB framework, a comparison between IASB framework and AASB framework and a position statement of adoption of IASB.[pic 2]

AASB CF guides Australia firms in preparing financial reports. The objective of general purpose financial reporting is to provide useful financial information of the entity for investors, lender and other creditors, and help them to make decisions about providing resources to the entity (AASB, OB2). Companies determine the useful financial information through observing qualitative characteristics. Qualitative characteristics consist of fundamental qualities and enhancing qualities. Fundamental qualities include relevance and faithful representation. Financial information that is relevant and faithfully represented are considered as useful information for reporting. Comparability, verifiability, timeliness and understandability are enhancing qualities. The usefulness of information can be enhanced by these qualitative characteristics (AASB, QC19). After collecting useful information, companies need to classify information into some elements, including assets, liability, equity, income and expenses. All of these elements will display in the balance sheet or income statement. Next, companies use definitions of elements and criteria to ensure that every element satisfies the recognition criteria. This could increase the reliability of financial reports. After recognising, businesses determine the monetary amount of financial elements. Different measurement bases, including historical cost, current cost, realisable value and present value, are applied in different situations or entities (AASB, para. 100). In some cases, one measurement basis can be combined with other bases. For example, the measurement of inventories could combine historical cost and realisable value.

The following will provide a comparison between IASB ED and AASB, which is associated with aspects mentioned above. Firstly, in the objective of general purpose financial reporting, IASB uses the term “stewardship”, but AASB does not include it (Tysiac, 2015). Management’s stewardship function is a necessary part for users of financial statements to evaluate a company (Deloitte, 2015a). Secondly, in AASB’s section on qualitative characteristics, AASB does not include a discussion on prudence, but it is included in IASB ED. Under conditions of uncertainty, prudence is described as caution when making judgement, and helps achieve neutrality (EY, 2015). After taking account of prudence, assets and liability could not be understated and overstated (IASB, para. 2.18). Thirdly, in the definitions of assets and liabilities, AASB requires an “expected” or “probable” inflow or outflow, but IASB ED defines it as “the potential to produce economic benefits or to transfer economic resources”. Moreover, AASB defines an asset as a resource. However, IASB uses the term “economic resources” and defines it as a right. AASB’s definition focuses on an asset itself, but IASB’s definition focuses on a right (Deloitte, 2015b). For example, a truck is a factory’s asset, and the factory records the truck as a physical object in the financial position statement under AASB’s definition. By contrast, the factory records a truck as a right to use the truck under IASB’s definition. Finally, in the section of recognition, an entity applies probability criterion under recognition of AASB. However, IASB’s recognition criteria is based on qualitative characteristics that are relevance and faithful representation. Furthermore, IASB contains approaches to derecognition, but AASB does not have a guidance on it. In the part of measurement, AASB provides four measurement bases, whereas the emphasis of IASB is historical cost and current value.

The adoption of IASB is a complex issue in Australia. Under the transaction neutrality policy, AASB is responsible for setting accounting standards for all types of reporting entities, including for-profit sector, the public sector, and not-for-profit sector. However, IASB’s focus is on for-profit entities, it does not provide an adequate guidance for not-for-profit entities to prepare financial reports (IFRS, 2016). It is feasible for AASB to incorporate IASB CF into AASB’s CF, if AASB provides a guidance on issues related to not-for-profit entities’ financial reporting (Paul, 2013). As mentioned above, the objective of financial reporting is to provide information for stakeholders as to assist their decision-making. In order to develop the additional guidance for not-for-profit entities, AASB needs to identify the broad range of financial information users of not-for-profit entities, and what their information needs might be (Howieson, 2013). Generally, financial information users of not-for-profit entities do not pursue financial returns from investments in the entity. These users pay more attention to the ability of entities’ resources to provide goods and services. For example, taxpayers could be interested in if public not-for-profit entities are delivering expected services and goods. Creditors could be interested in the ability of entities to generate cash inflows. Another key concern of not-for-profit entities is directly associated with “contributions”. Contributions to not-for-profit entities could be donations, grants and non-cash contributions such as capital assets and materials. In fact, some contributions may not be used at public not-for-profit organisations’ discretion, but restrictions and conditions need to be attached (Ryan, Mark & Irvine, 2014). For instance, grants may be attached a restriction or condition, which can limit the purpose for applying grants, but generally does not require funds to be returned if a restriction or condition is not met. AASB can require not-for-profit entities to disclose these restrictions on the use of contributions. In addition, AASB can acquire some help from CF of International Public Sector Accounting Standards Broad (IPSASB). AASB1058, BC168 states a broader definition of contributions than that in AASB is provided by IPSAB. AASB can adopt ISPAB’s definition of contributions and then produce a suitable Australian version. Thus, AASB can adopt IASB based on the evaluation of sector-neutral policy as those issues specific to not-for-profit entities are solvable.

In conclusion, the IASB ED adds some terms such as “stewardship” and “prudence”, and provides slight different definitions of financial elements and a guidance on derecognition. Adoption of IASB into AASB is controversial because IASB cannot satisfy not-for-profit sector. However, adopting IASB in AASB is still feasible as long as AASB can identify financial information users and satisfy their information needs. Also, AASB needs to persistently revise CF through analysing feedback from real operation of all sectors.