Give an example of a situation in which the implementation of a new accounting standard could have far–
reaching social or economic consequences.
Ans.
There could be a lot of instances given here, thus a full answer isn’t conceivable. The international
publication of IAS 38 Intangible Assets is one example. This guideline mandates that all research be
expensed when it is incurred, among other things. This is in contrast to the requirements that existed
previously in Australia. Prior to the adoption of IFRS in 2005, reporting organizations in Australia were
permitted to capitalize research expenditure (subject to certain deferral conditions). Some entities may
have deferred or even cancelled some research activities as a result of the new obligation to immediately
expense research expenditures. We’ll never know if such postponed or canceled research could have
resulted in big ‘breakthroughs’ with significant social implications. As a result, the implementation of IAS
38 in a number of nations may have had serious social consequences.
Another example is the IASB and FASB‘s ongoing (and very long-winded) efforts to draft a new accounting
standard on leasing. This new accounting standard – which has proven to be very ‘political’ in nature in
terms of the number of submissions received from various vested interests (all of which have contributed
to years of delay in issuing a final standard) – will most likely result in a reduction in the use of asset
leasing. The drop in leasing will, without a doubt, have immediate cash flow implications for a variety of
businesses. Requiring many leases to be recognized in the statement of financial position (many of which
were previously exempt from recognition) could result in many organizations potentially failing on various
debt covenants, which would have a variety of economic effects.