Advantages and Cost of Adoption in Australia of International Financial Reporting Standards (Ifrss)

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The issue of adoption of international financial reporting standards (IFRSS) in Australia has been controversial issue since the first time Australian Financial Reporting council (FRC) announced the policy in 2002. Many believe that IFRSS adoption will lead to great advantages such as enhance financial report comparability, improve quality of financial reporting, attract more foreign investor, and other significant advantages. However, some also believe that the adoption merely result in disadvantages and cost for Australian business, accounting profession and even Australian government.

Before deciding to fully adopt IFRSS, in 1996, the AASB issued Policy Statement 6 International Harmonization Policy with objective to ‘pursue the development of an internationally accepted set of accounting standards which can be adapted in Australia’. There were several considerations why government decided to do so: 1.‘The existing arrangements for accounting standard setting are confusing, inefficient and not conductive to stakeholder participation 2.There is duplication between the AASB and PSASB

3.Australian Accounting Standards are not understood in, and are out of step with, the major capital markets in the United States (US), United Kingdom (UK), and Europe, resulting in higher costs of capital for Australian Business 4.The standards setting process is perceived to be dominated by the accounting profession and there is no real accountability to its users 5.Accounting standards do not reflect modern business practice, being too prescriptive and overly technical that imposing excessive costs on business 6.The process involved in standard setting have failed to attract broad input and the necessary level of financial support, with the result that accounting standards are not meeting the demands of constituents’ (CLERP 1997, pp.11-12, cited from, 2006).

Despite those reasons, IFRSS adoption is promoted because several claimed benefits potentially arising from the policy especially for Australian Business. The most claimed benefit is attracting foreign investors due to lowering cost of capital. Cost of capital can be decreased because IFRSS adoption can diminish ‘premiums associated with the risk of not fully understanding the financial report’ (Collet, 2001, cited from Gerhardy, P.G., n.d. ). Another hypothesis is that IFRSS adoption can reduce ‘home bias’ that discourage investors from making cross border investment. One of factors contributing to home bias itself is the expensive cost of information about foreign investment (Kang and Stulsz, 1997 cited from Cofrig,V.M., Defond, M.L., & Hung, M., 2007). By adopting IFRSS, it is hoped that information about foreign investment can be easily obtained and understood because it is generated from universal standards that are more familiar for investors. In addition, high accounting quality, transparency and comparability are commonly associated with financial reporting produced based on IFRSS that is internationally recognized and represent worldwide best practices. Those attributes alleviate ‘information asymmetries between managers and outside investors, thus increasing liquidity and ultimately lowering the required rate of return’ (Diamond and Verrecchia, 1991, cited from Daske, Holger, 2006). Association between higher accounting quality and IAS/IFRSS itself has been examined by Barth,M.E., Landsman, W.R., & Lang, Mark H. in 2008. They investigate firms from 21 countries that applied IAS and found that those firms generally ‘evidence less earnings management, more timely loss recognition and more value relevance of accounting amounts’.

It has been suggested that IFRSS adoption benefits Australian business trough saving in reporting costs. This benefit especially applies for Australian Business that wants to list their stocks in other countries’ stock exchanges. It is obligation for companies to fulfill specific different requirement regarding financial...
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