This paper explores about how the accounting standard changes over time, and who are held responsible to make changes to these standards and on what norms. This paper extends its discussion on accounting standard changes with respect to relevant industry requirement and accounting aspects relevant to domestic and international accounting standards and incorporate the outcomes into to the Australian Accounting standards.
This paper has two major segments terms as: Part A and Part B. Part –A explores the research and study done for changes made to accounting standards and the process of the changes of the accounting standards. How the accounting standards are been issued and what elements are taken to make changes in the standards and do the IAS are also being taken to measure the changes in the standards or not, are some of the queries that are being discussed and elaborated.
Further, Part-B is a report responding to the Exposure Draft ED 116 Property, Plant and Equipment- Proceeds before Intended Use, the impact on the industry and the accounting treatment necessary as per IAS with reference to AASB.
Accounting standard is a set of principle that standardizes and directs the accounting practices in the wide variety of industries and enterprises. It is a guideline for financial reporting as per the business needs and presents the business assets, liabilities, incomes and expenses according to standards set by the Accounting standard Board.
Australian Accounting Standards Board (AASB) is an government body setup by an special act passed by the Australian government which develops and maintain the financial accounting and influence the reporting standard applicable to enterprises in private and public sectors of Australian economy.
This special body of government, act to replicate the standards so set for business entities and also add the interpretation which is used by various entities who are required to prepare financial reports as per the Corporations Act, 2001, to the government sector entities for preparing the financial statement and also the private, not-for-profit sectors that prepare general purpose financial statements.
AASB also incorporates the changes in the current affairs in the Australian economy and the international practices as per changes in the International Accounting Standards Board (IASB).
Accounting standards are the set of guidelines that guides the entity and the industry to report their financial performance as per the generally accepted accounting standards. In the process of adopting the changes in the current affairs of the accounting principles and economic situations the accounting standard should be mold according from time to time. A very question raised in our mind, is how the accounting standards are been prepared and how it determine the changes need to be done with current affairs and how relevant is such changes to the industry.
Well, here is the pictorial representation of the process set by the Australian Accounting Standard Board (AASB) to work with the policies and process and their powers and functions regarding the Accounting standard determination.
As shown in the diagram, the work performed by various of the bodies are now discussed here briefly.
Australian Accounting Standard Board:
This body consists of its several members and staffs who are assigned specially for identifying the issues requiring consideration. Further the issues identified in relation to profit organized entities are been normally referred to the IASB or the IFRIC organization for their consideration.
Further the issues relating to the not-for-profit organizations/entities in the public and the private sectors are been overviewed locally or been addressed to the IPSASB.
Australian Organisation/Individual identifies a technical issue:
As the stakeholders are been the major key players and the end users of the standards so prepared, so they can also advise the AASB of the issues that are considered by the AASB or an international standard-setter.
International Organisation identifies a technical issue:
After incorporating the local issues and the stakeholders issues, the AASB board also set policies to refer the international policies and standards to update the policies as per the international norms. For this purpose a technical issue are been identified by the International Accounting Standards Board (IASB) or the IFRS Interpretations Committee (IFRIC).
The history of adopting the international issues has been started since 1 January, 2005. So, the issues on the IASB work program and the IFRIC work program are also included on the AASB work program, although the degree of involvement by the AASB varies issue-by-issue and may be substantive or non-substantive.
Further the AASB monitors the work associated with the issues with the IPSASB and report the adopt the situation to the technical parameter and introduce such changes with the technical issues.
Now, the next step after identifying the technical issues by the different bodies is to add the issue to the agenda. Then, the AASB will develop a project proposal which will be the detail work program of the project regarding the benefits of undertaking the proposal, the estimated cost of not undertaking the project, the resources available to adopt the project and the time taken to accomplish the project.
AASB will closely monitor all the pros and cons of the proposal and decide whether the project is feasible and whether the same is to be placed in the agenda (work program) or not. In case, the proposal is not been added to the agenda, then the board use to announce them formally as “item not taken onto the agenda” or “agenda rejection statements”.
The third step, on this process is, Research and consider issue, which is done once the issue is added to the agenda and the AASB discuss such papers presented by AASB staff. The said paper includes the scope of the issues, alternative approaches, and timing of outputs. Further they will research the additional/relevant materials from the other standard setters, including the IASB, the IPSASB and the New Zealand Accounting standard Board or from other organizations. All the materials so collected for the research are been monitored separately. Once the relevant papers are been collected from the different source then the research paper are then send to the Stakeholders, which itself is the next process of setting the Accounting Standards.
Thus, this process is started once the research has been completed and the AASB makes the relevant documents available for public comment and discussion with the stakeholders view one of the following types:
- Exposure Drafts( EDs)
- Invitations to comment (ITCs)
- Draft Interpretations
- Discussion papers (DPs)
Further the methods of AASB that use to consult with the stakeholders may also include the following:
- Roundtable discussions
- Focus Groups
- Project Advisory Panels
- Interpretation Advisory Panels
As stated above, are the methods of AASB to consult with the stakeholders either by having a formal discussion with a range of stakeholders in relation to the proposals issued for comment, or to discussion with the focus group having their representatives of financial statements like investors and investment professionals, donors, community agencies in the private sectors and the statement preparers. Along with them, the project advisory panels which are appointed by the AASB for the purpose of advice and comments to the staff and the AASB members as agendas paper are developed to address an issue. And by forming an interpretation advisory panels for giving the alternative views to an issue and which will be monitored by the AASB and then such views are also been taken while drafting the standards.
After all the ways possible research and advisory of the different technical fields and stakeholders comments, AASB will issue the outcomes of the issues into pronouncements, such as a standard, and interpretation, or a conceptual framework documents.
Pronouncements are applicable for profit making entities with relation with IFRS so issued by the International Accounting standards Board. The process of incorporating the IFRS into the financial statement prepared by the profit entities is to make ensure that the general purpose financial statements prepared by for profit entities in accordance with AASB standards will also be in accordance with IFRSs.
As per the Board, “The AASB has a transaction neutrality policy under which similar transactions and events should be accounted for in a similar manner by all types of entities, whether in the for-profit sector, the not-for-profit private sector, or the public sector- unless there is a sound reason to be different in particular circumstances. The AASB considers the specific needs of not-for-profit entities in the private and public sectors when preparing new and revised IFRS for adoption in Australia.”
Now then the AASB formally comments upon the submission and the input form stakeholders on the AASB’s own proposals and in relation wot various consultative documents issued by the IASB and the IPSASB. The AASB considers this input in making submissions to the IASB and the IPSASB and in developing its own pronouncements.
Then the final segment will be the implementation of Accounting standards and monitoring them as per the regular terms and will incorporates the revisions to domestic AASB standards or to submissions to the IASB or the IPSASB to propose changes to international standards.
Further the compliance with Australian standards and interpretations are been monitored by other organizations, such as: (ASIC) the Australian Securities and Investment Commission, (APRA) the Australian Prudential Regulation Authority, (CPAA) CPA Australia, (CAANZ) the Chartered Accountants Australia and New Zerland and (IPA) the Institute of Public Accoutants.
Now from the above detailed explanation of the process of working for setting up and forming the Accounting standard board, we can now been able to reply to the query:
- How does the AASB incorporate changes to international accounting standards (i.e. changes being pushed from the IASB) into the Australian accounting standards?
- As defined above, the members and the staff members who are being assigned to accumulate the technical issues along with the international organizations which are specially appointed for finding the technical issues relating to the affairs that needs to be added to the agenda of the affairs. The such affairs are being then put in the Board meeting and the research done by the staff and members are being accumulated and the required issues is then transform into the pronouncements in form of standards.
2.How does the AASB incorporate local, Australian issues into the Australian accounting standards?
- The issues relating to the private and the public sectors are been addressed to the IPSASB, who will then refer the study and the technical issues so accumulated are being added to the agenda and then the research study papers are being discussed in the Board meeting. Further then, the such paper are being then submitted to the public documents and ask for their recommendations and the necessary changes are being then incorporated in the form of standards and pronouncements.
AASB work program recently held on 17th August, 2017 discussed the several agenda, regarding the domestic projects like AASB 13 for not-for-profit entities, AASB Guidance to Tax Transparency Code, Cooperatives and Mutual Entities, Long-term Discount Rates, IASB standard-setting projects like, Disclosure of IAS1 and IAS8), IAS Research projects and various other primary Financial statements and Dynamic Risk Management.
AASB issues the news section where it podcasts the relevant news of the industry and the recent changes in the International industry, Media Release, Employment opportunities, Public comments Strategies, incorporation of recent amendments and various tax related issues.
Part-B Report on ED AASB 116/ IAS16
In this Exposure Draft, the International Accounting Standards Board (Board) proposes to amend IAS 16 Property, Plant and Equipment, to prohibit deducting from the cost of an item of property, plant and equipment any proceeds from selling items produced while bringing that asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Instead, an entity would recognise the proceeds from selling such items, and the costs of producing those items, in profit or loss.
While agreeing to the board proposal, the accounting method of calculating the value of Property, Plant and Equipment will simultaneously affected. While previously the Property, Plant and Equipment were valued net of the proceed from selling items produced while bringing that assets to location and the cost of producing those items in Profit and loss account will leads to increase the profit amount and tends the tax amount for the entity. If the amount is being adjusted itself in the Property, Plant and Equipment, the it would not have been any effect in the financial position of the entity, but the disclosure of sale amount in the profit and loss account will then increase the revenue of the entity and so the burden of tax will increase.
Further, the company accounting system will be change in terms from recording the sale of such items as “Revenue from other operations” and showing the relevant cost by either showing them as below the line item or as the expense from the operation. It will be a separate issue for the entity regarding whether the cost should be apportioned into the Revenue item or show them as a separate line item. So, such variance will leads to a complex accounting treatment. In every item, the company first need to identify the amount that needs to be shown as the revenue and then collect all the relevant cost in the profit and loss account. The revenue from the sale of item should be figured and valued as per the GAAP and IAS 16 Property, Plant and Equipment. The cost related to such item sale will be then recorded on the debit side and then the profit will be calculated on the overall revenue-cost of the entity.
Now, if the overall impact of this amendment is monitored then we can acknowledge that the company which having the higher manufacturing operation will leads to show the profit margin higher than the earlier amount. Earlier, the sale of item net of expense were deducted from the Property, Plant and Equipment, and then the net amount were amortized yearly. But as per the amendment the sale will be shown in the very first year of the item sold along with the cost element, then the profit will be tends increase. Further the amortization cost will also increase as the cost of the Property, Plant and Equipment will be at real value. The net effect will leads to increase in the profit for the current period, but for the later periods the amortization cost will be higher than the previous accounting method. It will leads to adverse profit situation for such periods.
So, overall impact to the manufacturing operations is that, the operation leads to various assets items to higher value than they use to be. The cost of the Property, Plant and Equipment will increase in the financial statement and the cost like testing cost, which are earlier added to the cost of the Property, Plant and Equipment, when the cost of testing were exceed to the value of the items sold, are now shown in the P&L account. So the manufacturing operations are now able to show the cost of such assets below the par value. Cost of testing is an influence cost to make ready of the product or the assets to use as per the management criteria. So, such cost should be deal with fair & true view.
AASB is an organization which accumulates the necessary changes in the domestic as well as the international standards as per IASB, and design the standards fit for the use for the private and public entity. So, I believe that the changes made in the IAS 116, will preclude changes in the IFRS and thus the other standards will have to incorporate such changes to their standards as well. But to modify the AASB directly without setting the trend changes in the IAS 116 will leads to the conflict to some entity which follows the both standards for the reporting purpose. As some of the MNC’s are being reporting their financial performance in according to AASB and IAS also. So, to make changes in the IAS and then to modify the changes in the AASB will be a way to measure and explore the current moment will be a successful move to the local and MNC’s industry.
Conclusion & Recommendations:
As we discussed the process of the accounting standards setting and working of AASB and how the accounting standards incorporates the local and international issues in the standards and the research done by them. So, the bodies like ASIC, APRA, CPAA, CAANZ, IPA are working tremendously to monitor the compliance with Australian accounting standards and so as to inform the board to respond to the changes as quickly as they can.
Further, the process of identifying the technical issues, and having research and asking the stakeholders are some of the favorable and highly impressive element in the work flow of implementing the standards, as it leads to provide the consumer what they want.
In the next part, we have discussed about the Exposure Draft on Property, Plant and Equipment, proceeds before Intended Use, which has an immensely favourable impact on the industry interm of letting the profit in further years, but the current year profit will leads to appreciable if the sale item is more than the directly related cost and respectively.
It is thus recommended, that the accounting system regarding the tracing the directly related cost to the sold item should be highly elastic as the tracing will decide the revenue should be shown as revenue from operation or other revenue and the cost of Property, Plant and Equipment will be valued at true and fair method.
AASB, Australian Govt., (June. 2017), AASB Exposure Draft on Property, Plant and Equipment- proceeds before Intended Use
AASB, Australian Govt., (Aug. 2017), Board meeting & Work Program, Research Program and project Advisory panels.
AASB, Australian Govt, (2017), FAQs