Cost of Adoption in Australia of International Financial Reporting Standards

The issue of adoption of international financial reporting standards (IFRSS) in Australia has been controversial issue since the first time Australian Financial Reporting council (FRC) announced the policy in 2002. Many believe that IFRSS adoption will lead to great advantages such as enhance financial report comparability, improve quality of financial reporting, attract more foreign investor, and other significant advantages. However, some also believe that the adoption merely result in disadvantages and cost for Australian business, accounting profession and even Australian government.

Before deciding to fully adopt IFRSS, in 1996, the AASB issued Policy Statement 6 International Harmonization Policy with objective to ‘pursue the development of an internationally accepted set of accounting standards which can be adapted in Australia’. There were several considerations why government decided to do so: 1. ‘The existing arrangements for accounting standard setting are confusing, inefficient and not conductive to stakeholder participation 2. There is duplication between the AASB and PSASB 3.

Australian Accounting Standards are not understood in, and are out of step with, the major capital markets in the United States (US), United Kingdom (UK), and Europe, resulting in higher costs of capital for Australian Business 4. The standards setting process is perceived to be dominated by the accounting profession and there is no real accountability to its users 5. Accounting standards do not reflect modern business practice, being too prescriptive and overly technical that imposing excessive costs on business 6.

The process involved in standard setting have failed to attract broad input and the necessary level of financial support, with the result that accounting standards are not meeting the demands of constituents’ (CLERP 1997, pp. 11-12, cited from Pickeet. al, 2006). Despite those reasons, IFRSS adoption is promoted because several claimed benefits potentially arising from the policy especially for Australian Business. The most claimed benefit is attracting foreign investors due to lowering cost of capital.

Cost of capital can be decreased because IFRSS adoption can diminish ‘premiums associated with the risk of not fully understanding the financial report’ (Collet et. al, 2001, cited from Gerhardy, P. G. , n. d. ). Another hypothesis is that IFRSS adoption can reduce ‘home bias’ that discourage investors from making cross border investment. One of factors contributing to home bias itself is the expensive cost of information about foreign investment (Kang and Stulsz, 1997 cited from Cofrig,V. M. , Defond, M. L. , & Hung, M. , 2007).

By adopting IFRSS, it is hoped that information about foreign investment can be easily obtained and understood because it is generated from universal standards that are more familiar for investors. In addition, high accounting quality, transparency and comparability are commonly associated with financial reporting produced based on IFRSS that is internationally recognized and represent worldwide best practices. Those attributes alleviate ‘information asymmetries between managers and outside investors, thus increasing liquidity and ultimately lowering the required rate of return’ (Diamond and Verrecchia, 1991, cited from Daske, Holger, 2006).

Association between higher accounting quality and IAS/IFRSS itself has been examined by Barth,M. E. , Landsman, W. R. , & Lang, Mark H. in 2008. They investigate firms from 21 countries that applied IAS and found that those firms generally ‘evidence less earnings management, more timely loss recognition and more value relevance of accounting amounts’. It has been suggested that IFRSS adoption benefits Australian business trough saving in reporting costs.

This benefit especially applies for Australian Business that wants to list their stocks in other countries’ stock exchanges. It is obligation for companies to fulfill specific different requirement regarding financial reporting of each countries where the companies are listed. By adopting IFRSS, companies do not need to generate more than one set of financial reports to comply different requirement and regulation. It is also easier for multinational companies to consolidate their financial statement, thus it saves time and money.

Beside easy consolidation, IFRSS adoption also simplifies appraisal process of companies to takeover or merger with overseas enterprises and improves management control due to increased comparability internal management report between different segments or branches. For multinational companies, it will ease transfer of accounting staff across countries as well (Uddin, M. S. , 2005). Furthermore, a reduction in audit cost might be experienced by companies, because adoption of global standards (IFRSS) merely require global audit tandards, tools or systems that usually cheaper than specific products or services. This audit commoditization will close the expertise gap between the big five and force them to reduce audit fee. (Perera et. al, 2003,cited from Gerhardy, P. G. , n. d. ). For Australian government, fully adopting IFRSS is highly likely result in cost saving because the government does not need to spend money for AASB. It is evidence that Australian government spent huge amount of money for domestic accounting standards formulation.

Another advantage is that the government can ‘distance itself from any future corporate collapses, which tend to raise questions about the role of accounting and the quality of accounting standards in such incidents’ (ibid). Take example of HIH collapse. Furthermore, it can avoid miscalculation of investors’ tax liability, particularly tax related to income from overseas sources accepted by multinational companies (Uddin, M. S. , 2005) (global acceptance). Despite cost saving, IFRSS adoption might also increase overseas companies listing in the ASX (Haswell & McKinnon, 2003, cited from Gerhardy, P.G. , n. d. ).

It also retains Australian companies listed on ASX. It is argument of Stoddart (1999, cited from McCombie, K. ,n. d. ) that ASX’s rigorous support on full adoption of IFRS is due to ASX’s ambition to become ‘the main exchange in the Pacific Rim’. Despite those enormous advantages, it has been argued that IFRSS adoption lead to significant costs. The main argument is that IFRSs do not consider local needs and priorities as every country has their own ‘business environment, legal systems, cultures, language and political environment’ (Henderson and Peirson, 2000 cited from Malthus, S. 2004). However, to overcome this problem, IASB can accommodate flexible reporting standards that enable companies to choose alternatives that are more suitable for their external condition. It is opinion of some opponents of IFRS adoption that IAS is ‘insufficiently detailed’ (Uddin,M. S. , 2005, p. 4) that require accountants’ and auditor’ professional judgment. However, overly detail might be contra productive and not flexible in anticipating every changes and differences. Education for stakeholders related to changes in financial statement is considered as significant as well.

In a way, companies have obligation to ensure these users understand the changes. Companies also need to provide education and training for staff to adapt changes from preparing account using national standards to international standards. Since changes not only affect external reporting system, but also internal reporting such as budgeting system, this training might require huge amount of money. Often, companies need external experts in anticipating the changes such as actuaries and valuation experts that also need a lot of spending.

However, this transition cost is only initial investment that is short term; the cost will be diminishing once companies have already been stable with the new systems. Learning from UK, based on a survey conducted by PricewaterhouseCoopers, majority companies in the UK suggested that transition from local accounting standards to international standards would not require high costs (Malthus, S. , 2004). Coming to the accounting profession, it has been argued that IFRS adoption also bear costs due to the policy. Those costs might come from the need to re educate members of the accounting profession itself.

However, this argument is questionable because as a profession, accountants should improve their capabilities by ongoing training and education no matter what. Negative impacts of adoption of IFRS on rule makers such as Federal government and AASB have been public’s concern as well. Regarding federal government, it is argued that support devoted by federal government for IFRS adoption (Brown and Tarca, 2005) might put government ‘under political pressure not to impose rules on Australian companies that are inconsistent with those applied to companies in other countries’.

In term of AASB, adoption of IFRSs raised questions about the role of the body. By adopting IFRS that replace local standards, AASB might lose its status and role. This loss arguably hurt nation’s sovereignty because Australia somehow is ‘one of the world’s leading authorities on accounting’ (Haswell and McKinnon, 2003 cited from Gerhardy, P. G. , n. d. , p. 24). AASB might also have limited influence on the standards formulation process under IASB, thus Australia’s interest and relevant environment might not be covered by international standards.

However, this costs can be diminished as suggested by Carrol (2003d, cited from Gerhardy, P. G. , n. d. , p. 75) ‘that if Australia is to ensure that future standards developed by the IASB are relevant to the Australian environment it is necessary that Australia is positioned ‘as an influential leader in the international business environment’’. Having considered both advantages and costs, I would argue that benefit arising from IFRS adoption will be in the longer term worth the effort. The main reason for that is huge economic benefit arises from the IFRS adoption.

On the surface, economic benefit is merely enjoyed by multinational companies and investors. However, it will trigger Australian economy development because multinational companies represent greater percentage of Australian economy sources that absorb high number of employment. Small medium companies (SME) that is argued might become parties bearing most cost will benefit from multinational companies as a business partners such as supplier, particularly if Australia promote specific regulation to encourage the mutual partnership.

This will be domino effect that boost another sectors, thus benefit whole community. In addition, education cost that is claimed as significant cost only borne for short term and will be diminished in the long term. Education and training itself is inseparable part of accounting as a profession that need ongoing training to enhance capability and professionalism. The last reason is that IFRS adoption might be inevitable due to globalization that diminish border across nations and increase interdependency between nations.