HI6025 Accounting Theory and Current Issues: Adoption of IFRS

to interest payments as well as related borrowing fees that is needed to be paid by the company on its borrowings (Spence 2016).

Significance of the adoption of IFRS 

Proper emphasis had been given in this study to understand the impact of Australian equivalents to the International Financial Reporting Standards on the thin capitalization position especially in Australian listed companies. In this study, two of the objectives are being highlighted where the first objective is to evaluate the fact on how and why relevant IFRS is capable of affecting the thin capitalization compliance within the Australian companies (Simões, Ventura and Coelho 2015). The next objective is to qualify about these changes as well as relate it back to the accounting as well as taxation policy initiatives.

On 1^st of January 2005, process of IFRS was adopted as it had brought together at the time of undertaking dividend related decisions of business enterprises as well as there was adoption of further franking policy (Siau, Sault and Warren 2015). Adoption of international financial reporting standard is going to bring negative impact as it actually inappropriately influences consequences of tax activities and this was opined by groups of 100 (G100) as well as Institute of Chartered Accountants in Australia as and when required. This activity was observed especially in case of thin capitalisation of the business Enterprises (Chand 2016). Some of the changes have been made while recognising the valuation of assets as well as liability under the international financial reporting standards. This had led to compiling with the provisions for the thin capitalisation rules why some of the Australian companies and Australian generally Accepted Accounting Principles (Ruf and Schindler 2015).

Consequences of the Implementation of the IFRS

The consequences for adoption of IFRS are as stated below:

• The new provisions of the IFRS request entity to report higher amount of liabilities and assets in the balance sheet. One of such example is that under the new rules of IFRS loss on derivative financial instruments should be recorded in the balance sheet as a liability. This will significantly impact the calculation of capitalisation as it will affect the net asset amount (DeFond, Hung and Li 2014).
• The net asset position of the entity will be reduced on an overall basis. The main reason for such reduction is that the positions of the company are subject to higher volatility than it was encountered under previous GAAP regime (Richardson, Taylor and Lanis 2015).
• The new provision of IFRS required adoption of fair value accounting in case of assets, liabilities and equity. That means there are certain assets that are not recognised under present provisions of GAAP will be required to be recorded under the new provision of IFRS. The introduction of new IFRS provision will change the treatment of certain assets and liabilities (Picton 2015).

The main concern of companies in the adoption of IFRS is that the debt to capital ratio will significantly increase and it will cross the safe limit of 75% (Patterson and North 2017). This will lead to deduction in interest payment and loan repayment will be disallowed by the statue if the entity is cross the safe limit of the debt to Capital ratio. In order to avoid this the large multinational companies are undertaking recapitalisation programs so that the debt to Capital ratio can be maintained under the range of 50% to 75% (Bowman et al. 2017). The companies are adjusting the value of through revaluations so that they can maintain the safe limit. In addition to this various others adjustments are made the different elements of balance sheet that influences the capitalisation of Companies (Peter 2016).

The primary differences in the rules of the GAAP and the IFRS

There are substantial difference between the provisions of international financial reporting standard and generally Accepted Accounting Principles. These differences has impact on the calculation relating to thinly capitalised position of the company through recognition, measurement and classification of assets and liabilities. The main provisions of new IFRS that will have the largest impact are discussed below:

1. AASB 139 Financial Instruments: Recognition and Measurement;
2. AASB 138 Intangible assets;
3. AASB 132 Financial Instruments: Presentation and disclosure;
4. AASB 112 Income Taxes;

The impact of new provision on the thinly capitalised companies is expected to be industry specific. The new provision of AASB 139 will have significant impact on the valuation of assets and it could impact the thinly capitalised company. The provisions of AASB 132 classify is more financial instruments as Debt than equity (Nguyen 2016). The AASB 112 requires that the company should compare the carrying value of Assets and liabilities for determining the temporary differences for the purpose of calculation of deferred tax balances. The provisions of AASB 138 Intangible Assets provides that the internally generated brands, goodwill, customer list and the items of similar nature should not be recorded (Beck et al. 2017). The new provision requires that internally generated intangible assets like brand name are prohibited from recording in the financial statement. The companies that have large amount of such intangible assets in the balance sheet will be affected if the value of such as written down and this will have an impact on thinly capitalised companies (Lee 2014).

The effect of adoption of IFRS on thinly capitalised company

For this study, a sample of 105 to non-financial as well as non-insurance Australian listed companies had been selected in order to understand impact of international financial reporting standards on the thinly capitalised company (Khoo, S.A., Nickless and Hartanti 2017). In addition to that, it becomes important to understand the actual impact of international financial reporting standards on the thinly capitalised companies because of several factors. The reason behind is due to you've been implemented by the thin capitalisation companies where the assets are funded by involving high level of death and considerable less amount of equity for that purpose. Most of the business organisations believe in making use of debts for the purpose of financing their projects or in that case investment. In order to do so, companies need to maximize tax deductibility in case of interest payments that had been allowed in and across Australian companies. There are several advantages that is linked with the option of the standards as used for no valuation made in the financial statement elements especially in case of thin capitalisation companies as stated by the treasury. In this report, analysis has been done where it is seen that IFRS are comprehensive, objective as well as transparent in nature (Jovanovic 2014).

An analysis had been done to understand the significant policy implications and relating it with thin capitalisation compliance cost (Graetz 2015). It is all about the given provision that is laid upon the compliance cost that may increase because companies are needed to involve in conducting independent verification of the revaluation under the provisions of international financial reporting standards and link it with fair value assessment of the financial assets as well as liabilities of business organisation (Elliffe 2017). On the contrary, the compliance costs of the business organisation we increase adequately provided fair value measurement of the financial statement component provided with the thin capitalisation position of the business Enterprises in an effective way. On the contrary, the compliance costs of the business organisation we increase adequately provided fair value measurement of the financial statement component provided with the thin capitalisation position of the business Enterprises in an effective way. There can be various important policy implications where each plays vital role in understanding about impact of international financial reporting standards. To explain in detail, one of the most important policy implications is with the adoption of fair value accounting (Devos 2015). It is noted that several changes took place while adopting IFRS and recognising several financial assets as well as liability. In addition to that, determining fair value takes into account high amount of assumptions by the management resulting high level of uncertainty at the time of processing asset valuation, liabilities and equity within the business organisation. It is for this reason why adopting provisions of international financial reporting standards include components such as measurement as well as recognition of financial statement that result thin capitalisation provisions of the business enterprise (Freebairn 2016).

Conclusion 

From the above analysis, it can be seen that quantification of the impact that is needed for adopting international financial reporting standards had been done on 105 Australian listed companies. Furthermore, the calculation was done based on safe harbour that amount as well as comparing the amount with the interest bearing liabilities of the business organisation. The study event highlights the quotes as stated by Nethercott and Hanlon that adoption of IFRS as well as resultant convergence of tax and related accounting standard within Australia led to reduction in the thin capitalisation compliance for a given period of time frame.

References

Beck, A.K., Behn, B.K., Lionzo, A. and Rossignoli, F., 2017. Firm Equity Investment Decisions and US GAAP and IFRS Consolidation Control Guidelines: An Empirical Analysis. Journal of International Accounting Research, 16(1), pp.37-57.

Bond, D., Govendir, B. and Wells, P., 2016. An evaluation of asset impairments by Australian firms and whether they were impacted by AASB 136. Accounting & Finance, 56(1), pp.259-288.

Bowman, D., McGann, M., Kimberley, H. and Biggs, S., 2017. ‘Rusty, invisible and threatening’: ageing, capital and employability. Work, employment and society, 31(3), pp.465-482.

Chand, V., 2016. Transfer Pricing Aspects of Intra-Group Loans in Light of the Base Erosion and Profit Shifting Action Plan. Intertax, 44(12), pp.885-902.

Che Azmi, A. and English, L.M., 2016. IFRS Disclosure Compliance in Malaysia: Insights from a Small?sample Analytical Study. Australian Accounting Review, 26(4), pp.390-414.

DeFond, M.L., Hung, M., Li, S. and Li, Y., 2014. Does mandatory IFRS adoption affect crash risk?. The Accounting Review, 90(1), pp.265-299.

Devos, K., 2015. Implications for the concept of ‘tax benefit/advantage’as prescribed in the Australian and British general anti-avoidance rules in tackling tax base erosion and profit shifting. Common Law World Review, 44(4), pp.239-261.

Elliffe, C., 2017. Interest Deductibility: Evaluating the Advantage of Earnings Stripping Regimes in Preventing Thin Capitalisation. New Zealand Law Review, 2017(2), pp.257-284.

Freebairn, J., 2016. Design alternatives for an Australian allowance for corporate equity. Austl. Tax F., 31, p.555.

Graetz, M.J., 2015. Can a 20th Century Business Income Tax Regime Serve a 21st Century Economy. Austl. Tax F., 30, p.551.

Jovanovic, T., 2014. Did Tax Reform (Thin Capitalization Rule) from 2005 in Slovenia Achieve its Aim?. Lex Localis, 12(2), p.205.

Khoo, S.A., Nickless, J. and Hartanti, W., 2017. International tax developments. Taxation in Australia, 52(4), p.212.

Lee, Y.T., 2014. Australian taxation issues for Chinese investors investing in Australian real property. Tax Specialist, 17(3), p.102.

Nguyen, H.K., 2016. A Review of Research on Corporate Tax Aggressiveness and the Leverage Puzzle. J. Australasian Tax Tchrs. Ass'n, 11, p.139.

Patterson, D. and North, P., 2017. A Tailored Approach for New Zealand to the OECD's Proposals to Neutralise. New Zealand Law Review, 2017(2), pp.323-364.

Peter, V., 2016. International Taxation: Tax Equity Concerns. SGBED wishes to recognize the following sponsors, p.18.

Picton, J., 2015. Mid market focus: Thin capitalisation: The changes to available debt deductions. Taxation in Australia, 50(6), p.305.

Richardson, G., Taylor, G. and Lanis, R., 2015. The impact of financial distress on corporate tax avoidance spanning the global financial crisis: Evidence from Australia. Economic Modelling, 44, pp.44-53.

Ruf, M. and Schindler, D., 2015. Debt shifting and thin-capitalization rules–German experience and alternative approaches. Nordic Tax Journal, 2015(1), pp.17-33.

Siau, K.W.S., Sault, S.J. and Warren, G.J., 2015. Are imputation credits capitalised into stock prices?. Accounting & Finance, 55(1), pp.241-277.

Simões, A.J., Ventura, J. and Coelho, L.A., 2015. The Impact of Fiscal Policy on Foreign Direct Investment. Journal of Taxation of Investments, 32(3).

Spence, K., 2016. The evolution of corporate taxation-a work in progress. Austl. Tax F., 31, p.481.

Stewart, M., 2017. Australia’s Hybrid International Tax System: Limited Focus on Tax and Development. In Taxation and Development-A Comparative Study (pp. 17-41). Springer, Cham.

Taylor, G., Richardson, G. and Lanis, R., 2015. Multinationality, tax havens, intangible assets, and transfer pricing aggressiveness: An empirical analysis. Journal of International Accounting Research, 14(1), pp.25-57.