International Accounting Standards Board, IASB is an independent standard setting board which is responsible for the emergent and promoting of the use and application of International Financial Reporting Standards, IFRSs (www.iasb.org, 2009). IASB was founded on 1st of April 2001 replacing the International Accounting Standard Committee, IASC. IASB is overseen by an independent non-profit foundation, namely International Accounting Standards Committee Foundation, IASC Foundation (www.iasb.org, 2009). Members of IASB are appointed by the Trustees of the IASC Foundation, currently 15 members from 9 countries increasing to 16 members before 2012 (IASC Foundation Constitution, 2009).
Australia Accounting Standards Board, AASB is a government agency overseen by Financial Reporting Council (FRC), who is responsible for the developing of accounting standards in Australia. It was founded in 1991 replacing the Accounting Standards Review Board (Deegan, 2007). AASB has been all the while responsible for ‘making' and ‘formulating' accounting standards until the adoption of IFRSs in 2005. Now, AASB only develops standards that are related to the domestic issues or there is no equivalent IFRSs (Deegan, 2007). The major role of AASB is to participate and contribute to the development of a single set of accounting standards for world wide use (www.aasb.com.au, 2009).
Convergence and Interpretation
According to the President of Royal Dutch Petroleum Company, financial information is a form of language and it should be comparable so that economic decisions can be made at any time, thus differences in accounting standards should be lessened (De Bryjne, 1980). As a result of increasing international financial transactions in 1980s, the International Accounting Standards Committee, IASC has stated its objective to work for the improvement and harmonization of accounting standards (Jacob & Madu, 2008). Until the mid of 1990s, the efforts of developing single set of accounting standards failed to attract major industrialized countries like the US and UK. Moreover, the lacked of technical expertise, independence of its members, and representatives from decision making bodies had cause IASC failed to achieve its objective (Jacob &Madu, 2008).
IASC was transformed into IASB in year 2001 aiming to come out with a global set of quality, understandable and international accounting standards (Scott, 2006). One of the IASB objectives is to converge national accounting standard with the international accounting standard to a high quality solution (Scott, 2006).
In order to achieve convergence in accounting standards around the world, IASB work together with local standard setters (www.iasb.org, 2009). Statements of Best Practice: Working Relationship between IASB and other Accounting Standard-setters is a statement that records an understanding between IASB and standard-setters that have or in the process of adopting and converging the IFRSs (www.iasb.org, 2009). As stated in the Statement of Best Practices, local accounting standard-setters should aim to adopt IFRSs fully. In the process of convergence, additional disclosure requirements or removal of optional treatments does not mean non-compliance with IFRSs (Statement of Best Practices, 2009).
With the rapid growth of international trade and calls from investors for a single accounting standard, US Financial Accounting Standard Board, FASB signed the Norwalk Agreement with IASB (Jacob and Madu, 2008). In this agreement, both parties recognized their commitment in developing a high quality, compatible accounting standard that can be used globally. In October 2002, both IASB and FASB agree to work toward convergence (Johnson, 2002).
During the process of convergence, questions of interpretations may arise. According to IASB, local standard-setters should familiar with the implementation of IFRSs (Statement of Best Practices, 2009). If an issue requires an interpretation of IFRSs, local standard-setter can request International Financial Reporting Interpretation Committee, IFRIC to address the issue. IFRIC is an interpretative body that is responsible for the review of current accounting issues that have arise within the context of IFRSs (Statement of Best Practices, 2009). IFRIC works together with national committees in interpreting newly indentified financial issues that is not specified in IFRSs and those issues where conflicting interpretations have or may have develop due to the absence of guidance (Statement of Best Practices, 2009). The process of interpretation is according to a due process of consultation and debate, including drafting interpretations that is available for public comments (Statement of Best Practices, 2009). If it is necessarily for standard-setter issue an interpretation regarding its own issues, then the interpretation should be compatible with IFRSs (Statement of Best Practices, 2009). IFRIC interpretations are subject to IASB approval.
Australian Accounting Standard Board, AASB is one of the accounting standard boards who have adopted IFRSs and co-operates with IASB to achieve convergence in accounting standards (Deegan, 2007). In this globalization era, there is an increase demand for high quality and comparable financial data (Jacob and Madu, 2008). AASB believes that, in order to compete globally it should pursue a policy of international convergence and harmonization of accounting standards (AASB, 2002). This means that AASB will work together with other standard-setter to develop a new or revised standard that will add value to the development of global accounting standard (AASB, 2002).
Under section 227 of Corporation Acts 2001, AASB is required to participate and contribute to the development of global accounting standard (AASB, 2002). AASB act accordance to this section by viewing its international convergence and harmonization policy as important to its standard setting activities. AASB also adopts the work program strategies and international liaison and monitoring strategies in order to fulfill the requirements of s.227 (AASB, 2002).
In relation to its work program, AASB will align its work program with IASB and PSC (International Federation of Accountants Public Sector Committee) (AASB, 2002). AASB will also accepts the views of IASB, PSC and members of IASB, remove incompatible accounting standards and issue IASB and PSC discussion papers and exposure draft with minimum modification when necessary (AASB, 2002). In its international liaison and monitoring strategies, AASB will closely monitor the development of financial reporting. AASB aims to enhance relationship with IASB, PSC, members of IASB and IFRIC (AASB, 2002).
IFRSs for SMEs
The process of convergence went on well as there are now 100 countries adopting IFRSs including 27 European Union nations (Jones, 2009). The Asia economy leaders Japan, Korea and India are set to adopt IFRSs around 2011. All profit oriented and public companies in Canada are required to use IFRSs after January, 2011 (Jones, 2009). However, the world's largest economy, the United States is yet to confirm a date when it will start using IFRSs. The reasons behind may due to the needs of different set of accounting standards as current accounting standards are too complex and do not provide enough prescription (Jones, 2009).
The needs of a different set of accounting standard does not merely arise due to the complexity of the current IFRSs. It might be the differences in accounting practices employed in different countries (Deegan, 2000). The differences in the accounting methods may be caused by culture differences, political and legislation differences or the level of development from an economic perspective (Deegan, 2000). Colonial inheritance is also one of the factors contribute to these differences. Some of the factors are inter-related, for example, a country's legal and tax systems are heavily influence by its colonial inheritance (Deegan, 2000).
IFRSs have come under barrage of criticism of late, for example, IFRSs are said to be too complex and have caused some consternation in implementation (Raina, 2007). IFRSs could have benefit large corporations especially the Multinational Corporations, MNC it might be too complex and costly for private small and medium-size companies, SME to implement (Raina, 2007). A survey conducted by Deloitte has shown that 51% of the SME in US suggests that there should be a separate set of accounting standard for public and private companies and 63% of the SMEs will only choose to adopt IFRSs when required (Deloitte, 2009).
The full IFRSs developed by IASB were meant for large corporations to meet the needs of the resources provider (Shearer &Johnson, 2007). Users of financial statements of SMEs do not have the same needs as the users of public companies; they are typically focused on short term cash flow, liquidity and solvency (AICPA, 2009). Therefore, SMEs need a separate set of accounting standards.
Again we mention here, implementation of IFRSs is too costly for SMEs. What we mean here is not only the monetary term, but the cost of applying IFRSs would way outweigh its benefits (ASCG, 2008). Consider a case in Germany, neither EU nor Germany plan to adopt IFRSs for SMEs. If Germany's SMEs choose to follow IFRSs, it would be burdensome as the financial statements are prepared for information purposes only (ASCG, 2008). Therefore, the discussion in EU is that there is a need of a separate set of accounting standards and it should be as simplify as possible (ASCG, 2008).
Not all issues of IFRSs are burdensome to SMEs. Research shows that there were no problems for SMEs in understanding and applying the concept of balance sheet and income statement (Shearer &Johnson, 2007). Ironically, the IFRSs cash flow statement is seen as a useful instrument. But when it comes to disclosure requirements, problems arise. The disclosures were seen to be too complex, too cost intensive to derive and too sensitive to provide for SMEs (Shearer &Johnson, 2007). It is not appropriate for SMEs. Disclosure requirements should be reduce and amend to which it best fit SMEs.
In recording Plant, Property and Equipments, SMEs typically have problem in determining useful life. While large corporations might have expertise in determining the useful life, SMEs will need a concise standard that provide more guidance on this section (ASCG, 2008). Moreover, the option of applying revaluation method was not needed and the separate measurement requirements for assets held for sale are too complex for SMEs (ASCG, 2008).
One common criticism on IFRSs is the fair value policy. The fair value principle has been criticized for being too subjective and would result in significant volatility in financial performance (Kewalramani, 2008). The fair value method often produces unrealized gains and losses (Kewalramani, 2008). The tax treatments and distribution of these unrealized gains and losses are too complex for a SME (Kewalramani, 2008).
After five years of development process, IASB has issued a separate set of IFRSs for SMEs, known as IFRSs for SMEs on 9th July 2009 (AICPA, 2009). IFRSs for SMEs is a modification and simplification of full IFRSs specially designed to meet the needs of SMEs (AICPA, 2009).
Quality of Disclosures
All of the discussions above aimed to improve financial reporting. The adoption of IFRSs is motivated by the desire to seek for higher quality accounting standards (Daske &Gebhardt, 2006). However, higher quality accounting standard does not necessarily lead to the production of higher quality accounting information (Daske &Gebhardt, 2006).
The quality of information provided of disclosure is affected by the incentives of managers (Rogers, 2004). Managers typically have the power in choosing what information to disclose and what not, for example, managers tend to provide higher quality disclosures prior to selling shares as these high quality disclosures may reduce legal exposure in the future (Rogers, 2004).
We will look into a listed Australian firm in discussing this issue. Biota Holding Ltd (Biota) is an Australian drug development company based in Melbourne (www.biota.com.au, 2009). It is a public company listed on Australian Stock Exchange (ASX) under the code of BTA (www.biota.com.au, 2009).
As at 30th June 2009, BTA recorded its Intangible Assets at AU$ 8,402,000 approximately AU$ 4 million lower than previous year (Biota Annual Report, 2009). It comprises 3 items, royalty prepayment, computer software and research and development. The major accounting standard dealing with intangible assets in Australia is the AASB 138 ‘Intangible Assets' (Deegan, 2007). Intangible asset is defined as ‘an identifiable non-monetary asset without physical substance'. Thus, in order to recognize an asset as intangible, it should be non-monetary, identifiable, and lack of physical substance (Deegan, 2007).
Royalty prepayment is an expenditure where BTA receives royalty payments in return in relation to intellectual property (Biota Annual Report, 2009). Computer software is costs incurred in acquiring software and licenses that will contribute to future period financial benefits (Biota Annual Report, 2009). Expenditures on development activities are capitalized and all research activities are being expensed as paragraph 54 of AASB 138 states that no intangible asset arising from research shall be recognized (Deegan, 2007).
The disclosure requirements for intangible assets are set out in paragraph 118 of AASB 138. An entity shall disclose the useful lives of an intangible asset whether is finite or indefinite. Amortization method used shall be disclosed (AASB handbook, 2008). Royalty Prepayments have a finite useful life and typically end when contract expire, amortization is based on anticipate sales over the contract life. Computer software has a finite useful life of 1-3 years and it is amortized on a straight line basis. All capitalized development costs are amortized on straight line method when it is ready for use (Biota Annual Report, 2009).
Also, the gross carrying amount, any accumulated amortization and a reconciliation of the carrying amount at the beginning and end of the period shall be disclosure, paragraph 118 (c), (e) of AASB 138 (AASB handbook, 2008). All these requirements are recorded in BTA's annual report as Notes 14 ‘Non current-asset: Intangible Assets' under the notes of financial statements. The gross carrying amount, accumulated amortization and impairment and reconciliation of carrying amount are presented as required.
Gelb and Siegel's research shows that entities with significant level of intangible assets are more likely to emphasize on cash distributions (Gelb &Siegel, 2000). As the value of intangible assets is hard to measure, investors usually measure firm's value by looking at their cash distribution (Gelb &Siegel, 2000). AICPA committee on financial reporting has noted that users usually oppose the recognition of intangible assets in financial reports as they are difficult to quantify and value accurately (Gelb &Siegel, 2000). Nonetheless, realizing the importance of these assets, users typically require sufficient disclosure in order to understand how the intangible assets are quantified and measured.
The 2009 Annual report for BTA has clearly indentified their intangibles assets. Each item of the intangible assets is clearly stated and their natures are fully explained. The accounting estimates and assumption for the carrying value of intangible assets are sufficiently disclosed.
IASB plays a significant role in converging and interpreting IFRSs. They are on the track of getting a single set of high quality, understandable, and global accounting standards. The recent introduction of IFRSs for SMEs has shown that IASB is on their way of achieving global accounting standard. However, this objective cannot be achieved without the participation of US as they are the world largest economy. The chairman of IASB, David Tweedie has bluntly criticized US for not giving a firm date when it would adopt IFRSs (Jones, 2009). According to Tweedie, it is impossible to develop a single set of accounting standard without the US. However, as the economic pressures for convergence keep going, convergence will not fail (Jones, 2009).