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- 6 Marks
Question
You are the financial controller of Navrongo Ltd (Navrongo), a company that experienced a relatively difficult trading during the year ended 30 September 2018. Reporting deadlines for the 2018 financial statements are rapidly approaching, and you have a number of matters to finalize. The finance director made the following suggestion in an email:
“A revised accounting standard that is relevant to Navrongo is expected to be issued by the IASB during the 2019 calendar year. Based on the content of the corresponding exposure draft, the revisions to the accounting standard would be beneficial to Navrongo in the year of adoption. The 2018 Navrongo financial statements should be prepared using the proposed new accounting standard on the basis of voluntary early adoption of the new standard.”
Required:
Explain to the finance director, justifying whether you agree or disagree with the suggestion above
Answer
- General Rule on Adoption of New Accounting Standards:
- The International Accounting Standards Board (IASB) typically issues new or revised standards with a specific effective date, which is often in a future reporting period. Until the standard is formally issued, it remains in exposure draft form, which is not authoritative and cannot be applied in financial statements.
- Based on this, it is generally not appropriate to adopt an exposure draft or a proposed standard that has not yet been finalized or issued by the IASB for use in the 2018 financial statements.
- Voluntary Early Adoption:
- IFRS allows for voluntary early adoption of a standard, but this applies only when the standard has been officially issued and an effective date is specified. In this case, the standard is expected to be issued in 2019, and until it is formally published, Navrongo Ltd cannot apply the provisions of the exposure draft to its 2018 financial statements.
- Therefore, the finance director’s suggestion to apply the proposed new standard in the 2018 financial statements is not valid as the standard is not yet in force.
- Impact on Comparability and Credibility:
- Applying an exposure draft would affect the comparability of the financial statements with other companies that are following the current applicable standards. Users of the financial statements may find it difficult to understand the financial statements if an unofficial standard is used.
- Additionally, this could impact the credibility of Navrongo Ltd’s financial reporting, as it would be seen as using unapproved standards, which could lead to questions from auditors and regulators.
- Ethical and Professional Considerations:
- As a professional accountant, it is important to adhere to the regulatory framework and ensure compliance with approved accounting standards. Any deviation from this could be considered an ethical violation of the principles of integrity and professional competence.
- Peter should advise the finance director that adopting an exposure draft would not be in line with IFRS, and they should instead continue to prepare the 2018 financial statements using the existing, approved standards until the new standard is officially issued and applicable.
- Conclusion:
- I disagree with the finance director’s suggestion to early adopt the proposed new accounting standard in the 2018 financial statements. The exposure draft does not yet hold the authority of an issued standard, and applying it prematurely would lead to non-compliance with IFRS and undermine the reliability of the financial statements.
- Tags: Accounting Standards, Early Adoption, Exposure Draft, Financial Reporting, IASB
- Level: Level 3
- Topic: Regulatory Framework and Ethics
- Series: NOV 2018
- Uploader: Theophilus