ACC3011 Seminar 1 – Discussions

3.1 CONTEMPORARY ISSUE

Potential adoption of IFRSs in the United States

A suggested benefit of IFRSs is that they are principles-based, as opposed to the rules-based nature of
the US GAAP. Some researchers have suggested that this benefit may cease to exist as the
implementation guidance in IFRSs increases in volume and complexity, thereby negating the benefit of
IFRSs. Supposedly, IFRSs have, like US GAAP, gradually become rules-based to ensure the comparability
of financial statements across companies. Arguably, these rules help protect companies, their
accountants and their legal counsel against the aggressive tendency to sue in the United States. The
possibility that large international firms might have abused the international standards and not applied
them properly in financial statements raises doubts about the efficacy of the ‘principles-based’ nature of
IFRSs.

Concerns in the United States about convergence with IFRSs are many. By moving to IFRSs, investors
would receive the same information received in other capital markets rather than the supposedly
higher quality information provided by US GAAP. However, a study of companies adopting IFRSs in New
Zealand from 2005 to 2008 found that, contrary to prior literature suggesting that IFRS adoption would
be a significant event in accounting with important consequences for capital markets and the quality of
accounting information, evaluation of the consequences of IFRS adoption was predominantly negative.

Another concern is the independence of the standard-setting process of the IASB. A further issue is the
level of understanding of IFRSs by investors. The SEC has suggested that, to assess the effectiveness of
IFRS incorporation into the US financial reporting system, further work is necessary to assess levels of
investor understanding and education. The assessment of the effect on issuers is extremely important,
as they will be most affected by the transition to IFRSs. Investor groups were found to be very sceptical
about the possibility of any tangible benefits arising from the adoption of IFRSs. Finally, the
incorporation of IFRSs would require consideration of the readiness of all parties involved in the
financial reporting process.

Despite the challenges in incorporating IFRS into US financial reporting, there are several arguments
about the desirability to do so. A reduction in the accounting rules and the adoption of principles-based
IFRSs has the potential to bring clarity and comparability. Similarly, rules in themselves are insufficient
to bring this clarity and comparability because rules-based standards, tend to open the door to
loopholes in accounting treatment, thereby leading to the reporting of misleading information in
financial statements resulting in earnings management. Principles-based standards by focusing on
reporting the true economic circumstances, provide opportunity for auditors to exercise their
judgement to discover management’s misuse of flexible standards.

The concerns expressed by opponents of IFRS adoption in the United States, including concerns about
inconsistencies in the application of IFRSs due to their principles-based nature, are increasingly being
addressed through the growing volume of implementation guidance in IFRSs. Concerns expressed about
the independence of the IASB relate to the funding of IASB, due to its reliance on large public accounting
firms.

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QUESTIONS

1. Evaluate the argument that the United States should adopt IFRSs.

2. Rules-based standards are supposedly very different from principles-based standards. How are
the two types of standards converging? Is this the type of convergence that was envisioned by
those advocating IFRSs?

3. Why do some US commentators have doubts about the independence of the IASB?

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3.2 CONTEMPORARY ISSUE
Lobbying: standards not achieving the right solution

Presumably the accounting standards produced by the IASB will enhance the quality of accounting
information by producing standards that are conceptually and technically the best possible. But there is
a stumbling block in that the IASB is a non-for-profit organisation relying on the financial support of
certain communities. Does the reliance on private standard setting influence the quality of accounting
standards? In other words, is accounting standard setting not just about finding the ‘right solution’, but
also about making choices among the views of different individuals and groups who have conflicting
interests and often contribute to the finances of the IASB?

Hansen investigated 69 exposure drafts that became IFRSs in relation to whether the opinions in the
exposure drafts influenced the resulting IFRS. He found that 46% of the resulting IFRSs were changed,
and substantial changes were made to satisfy at least 75% of opposing lobbyists on 19% of them. He
concluded that lobbying appears to dominate the decision to issue an IFRS and that comment letters
have a significant impact on the form of the final standard. He also concluded that lobbying success is
positively associated with two factors: (1) contributions to the IASCF and (2) the size of the capital
market in the lobbyists’ home markets. Hansen interpreted these associations to indicate that successful
lobbying is associated with the lobbyist’s ability to affect the viability of the IASB.

In another study, Shields also investigated comment letters as a means of judging the success of
lobbying behaviour. She found that lobbyists (mainly business groups) are successful in blocking
proposed changes by expressing their views negatively rather than explicitly disagreeing. US lobbyists
are more likely to block changes than lobbyists from other countries. Shields concluded that the
influence of US lobbyists reinforces the Anglo-American nature of IFRSs.

From a different perspective, Sikka reported that the European Union (EU) was seeking to make large
international companies disclose the taxes they pay as well as the profits they make on a country-by-
country basis. The EU’s concerns were a response to tax avoidance by those companies where they
book sales, employees and assets in countries or jurisdictions where they have very few employees,
sales and assets. The resulting traditional financial statements and their associated segmental reporting
do not reveal the taxes paid in each country in which they operate. The EU sought meetings with the
IASB and the FRC but they showed no interest in the proposal. Considerable opposition to the proposal
came from the professional accounting bodies as well as major accounting firms and corporations. Not
surprisingly, support to the proposal came from non-government organisations such as Christian-Aid,
War on Want, the Tax Justice Network and Oxfam, based in developed and developing nations.

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 QUESTIONS

1. What is lobbying?
2. Analyse the various ways of lobbying that are reflected in this case. What kinds of lobbying
evade those wishing to expose both lobbying and the effects on IFRSs?
3. How does the non-profit status of the IASB and FRC expose these bodies to lobbying?
4. The IASB is incorporated in Delaware, United States. Why do you think it is incorporated there
rather than in the United Kingdom where it has its headquarters?

APPLICATION QUESTIONS

3.23 Coca-Cola Amatil conducted a campaign against Australia’s adoption of IFRSs in 2004. The
company lobbied against requirements that meant Coca-Cola Amatil’s balance sheet values would
have to be written down by as much as $1.9 billion.

a. What is meant by the term ‘lobbying’?

Lobbying is the attempt to influence decisions made by officials such as the members of the IASB
when setting standards.
b. Who would be likely targets of Coca-Cola Amatil’s lobbying activities?
The FRC? AASB? Federal Government
c. Why would adoption of IFRSs so heavily affect Coca-Cola Amatil?
IAS 38 would prevent Coca-Cola Amatil from including valuable internally generated intangibles
on their balance sheet
d. Did harmonisation affect Coca-Cola Amatil’s balance sheet?

Intangible asset
Impact on retained earnings of previous revaluation at 1 January 2004 (reduce by approximately $1.9
billion)

CCA’s investments in bottlers’ agreements are recognisable under IFRS. However, revaluation of CCA’s
investments in bottlers’ agreements at fair value is not permitted under IFRS. This will result in the reversal
of the previous revaluation (as was permitted under the previous version of AASB 1010 “Recoverable
Amount of Non-Current Assets” and the current version of AASB 1041 “Revaluation of Non-Current
Assets”), thereby impacting retained earnings and net assets on transition to IFRS
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2.1 CASE STUDY
CODE OF ETHICS — IFAC ISSUES REVISED CODE FOR PROFESSIONAL ACCOUNTANTS

IFAC’s recently released Revised Code of Ethics applies to all professional accountants — whether you
work in practice, in industry, in academe, or in government. It is effective from June 30, 2006.

This article is about ethical matters and the activities of the IFAC Ethics Committee. Besides ethics, IFAC
Boards and Committees develop international standards on auditing and assurance (ISAs), on education
and on public sector accounting. Each of the member bodies of IFAC — there are 163 currently from all
parts of the globe — undertakes to use its best endeavours, subject to national laws and regulations, to
implement the standards issued by IFAC in each of these fields.

Fundamental principles

The fundamental principles are:

 Integrity

An accountant should be straightforward and honest in all professional and business relationships. For
example, accountants should not be associated with information which they believe contains a false or
misleading statement.

 Objectivity

An accountant should not allow bias, conflict of interest or undue influence of others to override
professional or business judgements.

 Professional Competence and Due Care

An accountant has to maintain professional knowledge and skill at the level required to ensure that a
client or employer receives competent professional service. This requires accountants to act diligently
and in accordance with current technical, professional and legislative requirements when engaged in
professional activities.

 Confidentiality

An accountant should respect the confidentiality of information acquired as a result of professional and
business relationships and should not disclose any such information without proper and specific
authority unless there is a legal or professional right or duty to disclose.

 Professional Behaviour

An accountant should comply with relevant laws and regulations and should avoid any action that
discredits the profession.

Where accountants consider that any proposed professional activity might compromise compliance with
these fundamental principles they are required to put safeguards in place to mitigate the threat or,
where they cannot do so, to desist from the proposed activity.

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Threats

The threats identified in the Code are:

 Self Interest Threat

May occur as a result of a financial or other interest held by the accountant or a family member.

 Self Review Threat

May occur when a previous judgement needs to be re-evaluated — you cannot audit your own work.

 Advocacy Threat

May occur when an accountant promotes a position or opinion to the point where subsequent
objectivity may be compromised.

 Familiarity Threat

May occur when, because of a close relationship, the accountant becomes too sympathetic to the
interests of others.

 Intimidation Threat

May occur when an accountant may be deterred from acting objectively by threats — actual or
perceived.

The Code contains many examples of situations that may be faced by accountants and of possible
safeguards that could mitigate the threats. In some cases, the code makes clear that no safeguard could
adequately address the perceived or actual threat to the fundamental principles — for example, the
threat to objectivity (or independence) if an auditor held shares in his audit client — and, in such cases,
the only option is to walk away, to resign or to refuse the assignment. However, the Code clearly states
that the examples are not all inclusive and that the obligation is on the accountant to identify and assess
any threats that might arise in the particular circumstances faced — and then to address them
appropriately in accordance with the framework approach set out in the Code.

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Conceptual framework advantages

The advantages of this conceptual framework approach are that:

 the principles-based standards set out in the Code are robust and can be applied to the
diverse and varying circumstances faced by professional accountants;
 it avoids technical evasion of detailed rules;
 it is appropriate for global application; and
 it continues to be applicable in a rapidly changing environment.

QUESTIONS

1. Can you identify any potential problems or criticisms of the principles outlined in the conceptual
framework in the case?
The key problem with this set of principles is their broadness and the vagueness which is
associated with conceptual frameworks in general. The advantages of this conceptual framework
are identified at the end of the extract. The key disadvantage is in the vagueness of terms and in
specific application of these principles to practice. For example, what level of professional
knowledge is to be maintained to ensure competent service

2. Do you think using these principles would be interpreted and applied consistently between
individual accountants in determining whether an action is ethical?
Students should recognise that there would be differences in interpretation and application of
these concepts. For example, what would people interpret as honest? Would the idea of this vary
between individuals and particular circumstances? (In terms not of lies, but missions or
incomplete statements). Is honesty in business simply ensuring the letter of law is followed or is it
more than this?

3. How effective do you think such a framework is in (a) ensuring accountants act ethically and (b)
enforcing or penalising unethical behaviour?
Students should recognise that whether or not people, such as accountants, act ethically is
influenced by a number of factors that interact. These would include:
 The moral code/conscience of the individual accountant
 Expectations of the profession (such as set out in such a code)
 Expectations of peers — this could include the culture of the company/context
 Risks of unethical behaviour being detected — would need to consider levels of enforcement of
behaviour here
 Consequences of being found to have acted unethically (e.g. would it mean going to prison)
 Consequences of the unethical behaviour to the individual (i.e. the rewards/expected outcome —
is it worth lots of $s) and to others (if seen as not hurting anyone specifically, often people are
more willing to distort the truth)
 Consequences of not acting ethically (e.g. if being pressured by management to distort accounts
would you lose your job/promotion if you do not act unethically)
 Personal circumstances
While a Framework can provide guidelines and can be used by individuals to defend ethical
behaviour, in reality a number of factors combine. A key factor is the character of the individual;

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 there will always be individuals who do the right thing regardless of consequences to themselves,
and others who will readily ‘do wrong’ for their own benefits.
Re-enforcing or penalising in cases where there is debate about the whether a particular action is
or is not unethical, it is likely that, as a broad set of principles, it is open to interpretation that this
would make enforcement in these ‘borderline’ cases more difficult.

4. Would a set of specific rules about what constitutes ethical and unethical behaviours in specific
circumstances be more or less useful than the principles in the code of conduct outlined?
A broad set of principles can mean different interpretations (so less consistency) and can lead to
people interpreting events as outside the restrictions placed by the principles.
The advantages of specific rules (rather than principles) are that it is clearer whether an action is
or is not ethical. Therefore, less ambiguity, more consistency and it would be easier to enforce
and penalise. However, requirements into narrowing rules means that as long as the rule meet
actions outside of the specific rules are not ‘unethical’ as the rules specify ethical and unethical
behaviours. Also, in practice you cannot specify rules for every possible scenario/situation. An
analogy is the advantages and disadvantages of principles based accounting standards versus
rules based as discussed in chapter 3