Financial Reporting Local Authorities

Question: Describe about the Financial Reporting for Local Authorities. Answer: Introduction In global scenario it is important to make some common standards for financial accounting and to measure the performance of the entities. So, IASB has issued the IFRS to report the financial transactions in proper so that proper accounting can be presented in the financial statements. IFRS sets the guidelines for the conceptual framework to be followed all the entities. Firstly it is applicable on multinational companies but now it is applicable on all entities including local authorities. In this report various issues will be discussed on the matter related to implication of IFRS on local authorities. Apart of it various other issues will be discussed related to fair value accounting and presentation of financial statements. 1: Contemporary Issues of Accounting Theory Essay Overview of Current Discussion Fair Value Measurement The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) have undertaken a joint project for fair value measurement. The project provided the guidelines for stating the disclosure requirements as per the International Financial Reporting Standards (IFRSs) and US generally accepted accounting principles (GAAP). Fair value is regarded as the price received for selling an asset or paid for transferring a liability in an orderly transaction between the market participants. The main aim of the project is to attain convergence regarding the fair value measures. The new disclosure requirements are meant for providing guidance to the businesses on the use of fair value accounting at the time of developing their financial statements as per the IFRSs standards or USGAAP (Fair Value Issues among Auditors, 2016). The current issues regarding the fair value measurement is to improve consistency and uniformity in measuring fair value across IFRSs. The convergence between IASB and FASB is done to overcome the uncertainty across the financial reporting standards for assessing fair value of an asset. This will help in overcoming the challenges that auditors face at the time of measuring an asset fair value. Balance sheets of businesses nowadays commonly include valuation estimates that are very difficult to be comprehended by the accountants, auditors and investors. This project will bring consistency in fair value measurement through establishing new accounting standards in relation with derivatives, consolidations, revenue realisation and other issues. This project will increase the use of fair value measurements across the different countries leading to significantly rise in the need of professionals for fair value issues (Fair Value MeasurementJoint Project of the IASB and FASB, 2016). Financial statement presentation The IASB and FASB have also undertaken a project for guiding the organisations for presenting the information in the financial statements. The current issue regarding the presentation of financial information is to reduce complexity regarding the communication of financial information to the stakeholders. The main goal is to improve the usefulness of information presented by the business entities in presentation of financial information. This will help the investors and financial analysts in decision-making process regarding their investment in the company as capital providers (FASB, 2016). The project of IASB and FASB aims to present financial information in the statements in a manner so that it is able to give an estimate regarding the future cash flows of the business firms. In addition to this, the information presented in the financial statements should provide a complete overview regarding the financial stability of a business entity. These two principles are regarded as disagg regation and cohesiveness principles that aim at making the information presented in the financial statements easily understandable. The FASB and IASB have undertaken a project known as Financial Statements Presentation (FSP) project for improving the communication of financial information to all the businesses stakeholders. The project is meant to provide guidance to the business entities regarding the information to be presented to the stakeholders. This will directly affect the management of businesses by properly disclosing all the material facts and information to the internal as well as external stakeholders (FASB, 2016). Rationale for current discussion According to the views of Leonard (2010), the current discussion regarding fair value measurement relates to implementing the fundamental changes in the manner through which fair value is applied across IFRSs. The concept of fair value was previously taken to be current market value as per the IASB definition. However, the concept pose large problems to the auditors in realizing the fair value of an asset as it provides a measure of only entry value of an asset and ignores its exit value. The recent changes proposed by the IASB and FASB in regards to fair value measurement emphasizes on the incorporation of exit value of assets. Exit value of an asset indicates the future cash flows and thus fairly represents the capacity of an asset to provide present and future cash flows. The current issues relating to the use of fair value accounting is mainly in response to the credit crunch that has criticized the application of the concept of fair value across business organizations. The criti cisms include misleading of reported losses by the business entities during the period of global financial crisis through the use of fair value measurement concept. The fair values of assets are generally believed to be unreliable and thus often pose a financial risk for the overall financial system. Thus, in order to overcome from all these potential issues regarding the use of fair value accounting the IASB and FASB are undertaking the project for reducing the uncertainty in fair value accounting system. The changes proposed for the integration of exit value in fair value measurement concept will provide complete information about the future cash flows and current risk-adjusted discount rates (Leonard, 2010). As per the views of Epstein, et al (2009) the corporate scandals of Lehman Brothers and other financial institutions at the time of global financial crisis have lead to the emergence of debate regarding the increase in reliability of financial statements. In this context, the present project being undertaken by the IASB and FASB mainly aims to increase the reliability of financial information statements analysis. The aim is to increase the disclosure requirements for reducing the financial risks of the business corporations. This is done to prevent the fraudulent practices used by the business for overstating or understanding the information in their financial statements. The large financial institutions such as Lehman Brothers were reported bankrupt thus causing large losses to the investors. The main cause of the reporting of sudden bankruptcy of the company was use of deceptive accounting practices for presenting false financial information to the external stakeholders. As such, t he IASB and FASB are seeking to expand the disclosure requirements in the financial statements to prevent the occurrence of fraudulent accounting information in the financial statements. The implementation of standard accounting practices across all the countries reporting standards is extremely necessary for overcoming the issues of increasing corporate scandals at a global level due to publishing of false accounting information (Epstein et al., 2009). 2: Case Study Implication of IFRS for Local Authorities Richard Murphy in its famous article IFRS for local authorities: stop this madness now has put the bigger issue at stake for all professionals in field of accounting to think over the concern that implication of IFRS on local authorities is right or wrong. The concern raised by the Richard Murphy is that whether imposing the IFRS on local authorities is the right decision or it is creating a potential weakness at some point (Deloitte, 2013). First of all, it is true that on the part of Mr. Murphy and statement written by him is completely right. Lets discuss what Mr. Murphy has tried to say. According to him international accounting financial standard applies to all the major transactions occur at local authorities but it ignores certain major items such as public funds entrusted and supply of services. Both of these items are the most important management activities of local authorities that must be recorded but as per IFRS they are not required to be measured and recoded in the financial reports. I agree with the statement of Mr. Murphy due to fact that local authorities are small entities and they have rarely any public involvement so it is not required to impose the IFRS implications on such entities. The main aim of IFRS is to present the financial reports to the investors so that they can take investment decision on buy or sell o f the shares. Local authorities have no listing of stock exchange and investors are not generally interested in buying the shares of local authorities. So imposing the application of IFRS on the local authorities makes it difficult for them to maintain the accounts as per international standards (Moore Stephens. IFRS, 2009). Even if IASB has decided to impose the IFRS on the local authorities, than proper care should be taken while making changes in standards so that it is easily applicable to local entities. It has been noted that no changes have been made while application of IFRS has been made mandatory on the local authorities. This has violated the core management activities that local authorities carried out because IFRS lack such standards to measure the core activities in local authorities such as accounting for stewardship of public funds entrusted and supply of services. So it is true in voice of Mr. Murphy that implication of IFRS means potential disaster in our hands. It is true that Australian GAAP supports the accrual accounting and it measures the transactions that happened in prior period items. Financial statements are for stewardship that provides value for money and action over the period of time. On the other hand IFRS is used for measuring the value at given point of time. They are meant for providing an insight view of performance of entities to report to the investors so that they can make their decision on investment in the company. So it can be said that there is no requirement of imposing the application of IFRS on the local authorities. The main reason of imposing the IFRS on the local authorities is to provide benefits to the Big 4 accounting firms (World GAAP Info, 2008). IASB and Big 4 relationship It has been seen so far that there was numerous changes in the accounting standards and manner of financial reporting. IFRS has been introduced by the IASB to change the conceptual framework and various accounting standards have been added to the financial reporting. All these changes have put the burden on the entities to compile with requirements of financial reporting. It is not easy to maintain all the accounts as required in the new financial reporting requirements. All the multinational companies find it difficult to report all the requirement s of financial reporting, so they seek help from the Big 4 accounting firms to handle all the requirements of recording the transactions as well as preparation of financial report (KPMG, 2003). It has been noted that Big 4 accounting firms and IASB both take active participation is making changes in the IFRS as certain changes made in IFRS goes with the major requirements of Big 4 from the IASB. So it can be said that IASB work mainly for Big 4 point view and ignores the actual requirements of the companies who are facing tremendous problems in preparation of annual reports as per the requirement of IFRS. There has numerous reports from various authors that have reported that IASB does not work in public interest and they are giving the advantages to Big 4 accounting firms through introducing the various complications in the financial reporting that would have not required by the public to check the financial performance of company. Authorities/countries that tend to believe that IASB works in public interest through intruding the common accounting framework for all will now paying high fees to the Big 4 accounting firms to complete the procedure of financial reporting or to seek any type of financial help from them (Ernst Young, 2012). There has been recent example to understand the game play by Big 4 accounting firms and IASB. After the financial crisis in year 2008 and 2009, there is requirement by Big 4 accounting firms to make application of IFRS on the local authorities and in year 2010 it has been made compulsory by the IASB to make compliance with the requirements of IFRS for local authorities. It has to noted that there was no such mandatory requirements have to posed on local authorities as there was least public involvement in such entities. It was only done to increase the business area for Big 4 accounting firms. Implementation of IFRS in local authorities of Australia Before making any comment on whether it is advantageous to make implementation of IFRS for local authorities in Australia or not, let discuss some of important pro and cons of implementing IFRS in local authorities. Firstly it is not bad to say that IFRS promises more accurate, timely and proper financial statements that are easy to understand and make analysis on them. It is also true that every entity has its own stakeholders that require information to make the analysis on the performance of entity (IFRS, 2013). On talking about the local authorities it is true that they very less interaction with the public funds and people generally not invested in local authorities. So the point is that for the sake of more understandable financial reporting is it compulsory to make the adoption of IFRS on local authorities. The main advantage of using the IFRS is to satisfy the needs of investors through making the financial reporting common and easy to understand like in same as the professio nal do. Apart of this IFRS helps in standardization of accounting and financial reporting that can be a possible reason for imposing the IFRS on local authorities but it should be understand that IFRS only make the changes in accounting that can be easy to understand at international level but local authorities have no interaction with the public that have interest in the company (KPMG, 2013). Now the major disadvantages of IFRS can be related with cost that the entities have to bear while preparation of financial report and other documents to be deposited with government body. It the light of this disadvantage it must be noted that local authorities find it difficult to bear all the cost that have to paid to the accounting firms performing he work of financial reporting as they earn in limited profits with greater responsibility of families and other familiar works (Ernst Young, 2011). So looking at the consequences and limited advantages of IFRS it is not wise to make mandatory the application of same on the local authorities out there in Australia. It is because these entities serve only a small geographical area and has limited interaction with public. Also the cost related with accounting is so high that it cannot be afforded by such entities. Conclusion IFRS helps in making the accounting and financial reporting easy but they add extra burden on the local authorities and also it ignores major accounting transaction occurred at local authorities. So it can be said that it is not wise to made applicable of IFRS on the local authorities of Australia. References Deloitte. 2013. IFRS 1 First-time Adoption of International Financial Reporting Standards. [Online]. Available at: https://www.iasplus.com/en/standards/ifrs1 [Accessed on: 29 April 2013]. Epstein, B.J. et al. 2009. Wiley GAAP 2010: Interpretation and Application of Generally Accepted Accounting Principles. John Wiley Sons. Ernst Young. 2011. UK GAAP vs. IFRS. [Online]. Available at: https://www.ey.com/Publication/vwLUAssets/UK_GAAP_v_IFRS_-_The_basics_-_Spring_2011/$FILE/EY_UK_GAAP_vs_IFRS_-_The%20basics_-_Spring_2011%20.pdf [Accessed on: 14 October 2016]. Ernst Young. 2012. International GAAP 2012 - Generally Accepted Accounting Practice Under International Financial Reporting Standards. John Wiley Sons Fair Value Issues Among Auditors. 2016. [Online]. Available at: https://mercercapital.com/article/fair-value-issues-among-auditors/ [Accessed on: 14 October 2016]. Fair Value MeasurementJoint Project Of The IASB and FASB. 2016. [Online]. Available at: https://www.fasb.org/cs/ContentServer?pagename=FASB/FASBContent_C/ProjectUpdatePagecid=1176156576143 [Accessed on: 14 October 2016]. FASB. 2016. [Online]. Available at: https://www.fasb.org/project/financial_statement_presentation.shtml [Accessed on: 14 October 2016]. IFRS. 2013. About us. [Online]. Available at: https://www.ifrs.org/The-organisation/Pages/IFRS-Foundation-and-the-IASB.aspx [Accessed on: 14 October 2016]. KPMG. 2003. IAS compared with US GAAP and UK GAAP. [Online]. Available at: https://www.kpmg.co.uk/pubs/ias_comp_ukusgaap.pdf [Accessed on: 14 October 2016]. KPMG. 2013. IFRS Practice Issues. [Online]. Available at: https://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/IFRS-Practice-Issues/Documents/IFRS-practice-issues-IFRS10-transition.pdf [Accessed on: 14 October 2016]. Leonard, B. 2010. Report and Recommendations Pursuant to Section 133 of the Emergency Economic Stabilization Act Of 2008: Study on Mark-to-Market Accounting. DIANE Publishing. Moore Stephens. IFRS. 2009. [Online]. Available at: https://www.moorestephens.co.uk/IFRS.aspx [Accessed on: 14 October 2016]. World GAAP Info. 2008. UK FRS. [Online]. Available at: https://worldgaapinfo.com/uk.php [Accessed on: 14 October 2016].