Question

Question 1: Discuss how International Financial Reporting Standards (IFRS) are developed? and the role played by AASB in that process?

Question 2: It is argued by some researchers that even in the absence of regulation, organisations will have an incentive to provide credible information about their operations and performance to certain parties outside the organisation; otherwise, the costs of the organisation’s operations will rise. What is the basis of this belief? Please provide at least three reasons and/or theories to explain.

Question 3: Provide at least three arguments for, and three arguments against, the international standardisation of financial reporting.

Question 4: What are the fundamental qualitative characteristics and enhancing qualitative characteristic that financial accounting information should possess? what role do enhancing qualitative characteristics have relative to the role of fundamental qualitative characteristics?

Answer 1

Answer 1)

IFRS are developed by means of fair and transparent process. The following steps are involved in developing the standards:

• Agenda Consultation

Every five years, the Board conducts a comprehensive review and consultation to define international standard-setting priorities and develop its project work plan.

The Board can also add topics to its work plan if necessary between agenda consultations. This can include topics following Post-implementation Reviews of Standards; the IFRS Interpretations Committee may also request the Board review an issue.

• Research Programme

The board begin most projects with research—explore the issues, identify possible solutions and decide whether standard-setting is required. Often, they set out their ideas in a discussion paper and seek public comment.

If they find sufficient evidence that an accounting problem exists, the problem is sufficiently important to warrant changing a Standard or issuing a new one and a practical solution can be found, they begin standard-setting.

• Standard-setting Programme

If the Board decides to amend a Standard or issue a new one, they generally review the research, including comments on the discussion paper, and propose amendments or Standards to resolve issues identified through research and consultation.

Proposals for a new Standard or an amendment to a Standard are published in an exposure draft for public consultation. To gather additional evidence, members of the Board and IFRS Foundation technical staff consult with a range of stakeholders from all over the world.

The Board analyses feedback and refines proposals before the new Standard, or an amendment to a Standard, is issued.

• Maintenance Programme

Their work doesn’t stop once a Standard is issued. They also support implementation of the Standards and they make sure we maintain them.

When the Board issues its exposure draft, at the same time AASB also issues its exposure draft for incorporating the same in their standards. AASB considers constitutents comments in drafting its comments to the Boards. AASB monitors the development of an IFRS Standards, and provides input to staff or Board members as appropriate. Any new standard if introduced will be considered by AASB and will be introduced into their standards as required.

     Answer 2)

There are some arguments which say that even without regulations there would be incentive to give credible information to the users. Some of the theories are below:

• Adverse selection

Under the said theory if proper credible information is not presented by the firms they will not be able to identify themselves as quality firms. The theory was developed by George Akerlof. In the said theory he made a point that buyers would be interested to pay more for quality product rather than less quality product. Hence they would be interested to present quality information.Firms will be encouraged to present information even if the information is bad news to avoid the punishment for the absence of information.

• Moral hazard

Another theory was developed by Jensen and meckling where it explains the conflict between the management and the shareholders. The managers will be bind to work in such a manner that would improve the shareholders wealth.

The management could not enter into contracts against the interests of the shareholders. If the information is not presented properly by the management the shareholders might presume that the agents/management is acting against their interests. Hence even without regulation the management would give complete and credible information about the organisation

• Governance factors

Eventhough contracting may not be full proof for managerial opportunism monitoring through internal and external factors play a important role. They can appoint external parties to ensure that no opportunities are exploited by the management. Those who do not favour such external regulation would like present credible information suo motto without any such regulation. This theory has been developed by Fama & Jensen

Answer 3)

The following are the advantages and disadvantages of IFRS:

Disadvantages:

• Rules-based systems encourage creativity (and not the good kind) in financial reporting. They allow some to stretch the limits of what is permissible under the law, even though it may not be ethically or morally acceptable.
• IFRS provides general guidance for the preparation of financial statements, rather than setting rules for industry-specific reporting.
• IFRS are widely regarded to be more principles-based

Overall, there are more advantages to IFRS than there are disadvantages.

• The world's economies are becoming more integrated and having one accounting system will make life a little less complicated for both the companies and the investors.
• As multinational businesses continue to grow and expand, a thorough knowledge of IFRS is now essential for internationally active, growing businesses.
• There seems to be worldwide consensus surrounding the need for one global set of high-quality accounting standards and that IFRS is currently best positioned to fulfill that need.

              Answer 4)

Relevance and faithful representation are categorized as the fundamental qualitative characteristics of financial reporting information. The enhancing qualitative characteristics on the other hand include understandability, comparability, verifiability and timeliness).

The enhancing qualitative characteristics improve decision usefulness of financial reports when the fundamental qualitative characteristics have been established. They cannot determine financial reporting quality on their own. Enhancing qualitative characteristics will enable the users to comprehend the meaning. It would help in comparing two financial statements for taking investment decisions. It will also enable the information to be given to the users on timely basis so that right decisions could be taken at the right time.