International Financial Reporting Standards


 


 


This essay takes a look on the issues raised regarding the implementation of the International Financial Reporting Standards. It discusses the benefits associated with the adoption of such standards as well as its implications on companies in different countries.


Introduction


 


International consistency in accounting and auditing standards has become the demand of the global financial markets. With this, several countries have started adopting the International Financial Reporting Standards while others base their local standards on the IFRS. In Europe, public enterprises have already been required to prepare financial statements under the IFRS. On the other hand, reconciliation on the U.S General Accepted Accounting Principles (GAAP) is already being facilitated.


The trend towards these international standards is evidently growing and is expected to result in greater comparability and disclosure of information. The transition though encompasses not just the changing of accounting procedures. Companies will have to undergo extensive change and risk management to facilitate adoption. Also there remains to be issues concerning the complexities of the IFRS requirements in terms of measurement and accounting as well as the amount of information to be disclosed. Such areas of concern are yet to be fully resolved as continuous efforts are being made to improve the conflicts and contradictions.


Ultimately, the IFRS will be beneficial only after a consensus is achieved on how to apply such standards. Also, there are arguments that the IFRS is specifically suited to developed economies. As such, its implementation may be inappropriate to developing countries. Unless these critical issues are resolved, the objectives of the IFRS towards a single accounting standard may be far from reach. The transition and conversion to IFRS entails tremendous amount of changes to be undertaken. The adoption must eventually be able to bridge the gap between the IFRS and companies’ perception as to what is relevant to its circumstances.


Standardizing International Financial Reporting


Primarily, financial reporting is aimed at providing information to the existing and the potential partners of an enterprise as well as to the public. Well founded decisions are supported by the information resulting from the management’s stewardship. The framework of financial reporting standards mentions the concept of useful decision making. These kinds of frameworks are used in countries where there is noncodified law on financial reporting. With this, the standard setters are provided with important guidelines.


 Paragraph 12 of the International Financial Reporting standards state that “The objective of a financial statement is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions.”  Moreover, the Statement of Financial Accounting Concepts says that financial reporting function primarily to provide useful information to those who make economic decisions regarding business enterprise and investments to these enterprises (, 2004, )


The International Financial Reporting Standards (IFRS) refers to a set of standards in the area of accounting. This body of financial reporting standards is developed by the International Accounting Standards Board (IASB). To date, major nations are adopting these standards to a certain extent.


            A trend towards the use of the International Financial Reporting Standards (IFRS) is emerging in the global financial markets.  Historically, such standards are used on voluntary basis. Today, there have been a growing number of jurisdictions requiring the use of IFRS among companies for local reporting as well as listing purposes. In Europe alone, public listed companies are required by the European Commission quartered within the European Union to prepare financial statements that are in accordance with the IFRS. Such requirement affects about 7,000 enterprises. The evolution has affected the nature and the scope of national standard-setters which include that of the U.S Financial Accounting Standards Board (FASB) (, 2005)


            The primary focus of the International Accounting Standard Board is the convergence of accounting standards worldwide. In order to achieve this, the IASB will designate official liaisons to national standard-setters. As such they are responsible for close contact with their respective national standard setters. Agenda coordination and the assurance that IASB and national bodies are working for convergence are part of their responsibility. Among the countries with formal liaison are Australia (including New Zealand), Canada, France, Germany, Japan, the United Kingdom and the United States (, 2005)


Impact on the U.S GAAP


Implementation


Significant consistency in accounting recognition and measurement and the greater disclosure of information regarding financial statements are among the benefits of the IFRS implementation. However, there is still a long way before reasonable consistency can be achieved under the IFRS. Primarily, this is caused by the fact that there remains to be no substantial body of custom and practice or an accepted way by which IFRS shall be applied. A number of years of implementation by representatives of cross section businesses in different countries and industries are needed to attain a consensus on how IFRS can be applied. Until that is achieved, divergent practices and the limited comparability remain unavoidable


Undoubtedly, the current IFRS reporting platform is far from being perfect. The IASB announced that there will be no new international standards to be effective until the year 2009. Ongoing improvements are aimed at the elimination of deficiencies within the current standards and to facilitate global convergence and ultimately, to remove the onerous requirement of the reconciliation with the US GAAP. It is expected that five new or revised standards will be implemented by the year 2009(, 2006).


            Continued discussions are being made in the UK with regard to the future direction of corporate reporting and as to what type of convergence with the IFRS should be made. Among the many benefits of a common financial reporting language are greater transparency, consistency and comparability with entities. The adaptation of IFRS by companies is aimed to provide a competitive advantage in terms of quality, clarity and the credibility of disclosures (, 2006).


            The IFRS conversion is a huge challenge which has been dictated by the International Law in a relatively short time scale. In the UK finance community, almost all of the companies are able to achieve it on schedule indicating their expertise and professionalism. It is projected that around 100 countries will permit and require the use of IFRS by the year 2007(, 2006). In this sense, it will become the most widely used accounting standard in the world. The challenge remains on the part of the investors to engage in the debate and to influence future developments


Implementing IFRS requires the companies to an extensive change as well as risk management process. The conversion process would entail time, cost, effort and expertise to be able to be able to meet deadlines. Larger listed groups found it vital to use effective and timely communication with investors and analysts. The conversion to IFRS is not just changing a set of accounting principles with another. It involves a number of different financial accounting and disclosure requirements that may result to differences in the financial report. With it, the company executives are provided with the opportunity to challenge the way the company is evaluated by investors, stakeholders and competitors. Since the IFRS will affect every decision of the company, it is necessary that the management is able to foresee changes in terms of market perception.


            Primarily, there is concern about the preparedness of companies regarding the changes which IFRS will require. In February 2004, an Accountancy Age Survey revealed that only 34% of financial Directors are confident that their employees are ready for the IFRS implementation. In addition to this, a concern over the lack of attention on the implications of the IFRS to companies accounting systems is expressed by providers of software and accounting systems (‘’, 2004).


            One of the key issues that need to be addressed by companies is to educate the employees who are responsible for the preparation and use of financial statements. It is only in 2004 that international standards are introduced onto the syllabi by the professional bodies. Professional training firms need to be considered by the companies to provide training. Since the use of IFRS is expected to impact the transactions processes and the way they are given value, businesses should ensure the understanding of the impacts by the analyst and investors. Lastly, an accounting system that is capable of collecting, processing and reporting the information under the IFRS format is required of for the transition (‘’, 2004)


Critical Issues on IFRS Implementation


Generally, the IFRS is recognized by companies to bring more economic substance. The criticisms related to its implementation are the complexity of the new standard as well as the amount of work required to correctly implement the standards. IFRS financial statements pose greater complexities as compared to those which are based on national accounting standards. Such complexities arise from the extensive measurement rules and the greater number of disclosures required in IFRS than those of the national accounting standards. The disclosure requirements of the of the IFRS approximately doubled those of the UK GAAP and the Australian GAAP and four times to that of the French GAAP. The more complex accounting standards are interpreted and applied properly by a small number of technical experts. These experts are mostly employed by accounting firms and regulators rather than those which prepares and uses such financial statements (‘’, 2007).


The increasing number of complexities in terms of accounting measurements and disclosure requirements of the IFRS poses a danger to companies. This is because the preparation of the financial reports may only lead to a sheer volume of data rather than the communication of the performance and financial performance of the company. Moreover, the numbers of required disclosures are not assessed based on their significance to the company’s particular circumstances.


            Clearly, the implementation of these standards will require extensive judgment as to the selection and the application of the accounting treatments. In turn, consistency and comparability is restricted. Inconsistencies and conflicts within individual standards and between different standards are likely to arise as a result of the non coherent and integrated set of principles. Areas of known difficulty are yet to be addressed and the industry related accounting guidance on the IFRS shows to be very little. The selection and application of the appropriate accounting policies remain greatly dependent on the judgment of the management. This in turn becomes a limiting factor as to the degree of comparability to be achieved. Hence, the low level of familiarity and industry practices undermine the very objective of the IFRS (‘’, 2007)


The challenge of this principle based approach is the consistency in application and the transparent judgments towards the application of the standards. Participants must agree that the accounting made under the international standards conform to the spirit of the standards. Varying interpretation can cause tensions and even threaten the consistency of the application. Thus, the consistency within the conceptual parameters of the international standards must be ensured by the companies. The movement to a principle based approach entails the difficulty to accommodate greater acceptance of judgment. In order for such standards to work, rigorous interpretations and effective application must be ensured (, 2005).


Since the IFRS are principle based standards, they focus on the understanding of the economics which underlie transactions or events. They can be applied to differing environments and thus require a high degree of professional judgment (, 2005) As such, interpretations of similar issues may vary from company to company and perhaps from country to country. The aim of the single accounting standard is to enable comparability. Hence, the differences in the interpretations will have to be limited. The country adopting IFRS is required to fall in line with the international interpretations of the standard. In this sense, local interpretations must be in line with the interpretations of the rest of the world.


The use of non-IFRS measures in the result announcements of companies reflects the gap between the IFRS and what the company perceives as essential in communicating the information to the market. The usefulness of information is dependent on individual decision contexts. Apparently, standard-setters of financial reporting are incapable of knowing in advance which information is useful for the company. Both in the national and international levels, the data that is decided to be recorded and the way by which it will be disclosed in accounting statements are based on what the society, groups or interests of individuals consider to be significant to the needs of the users. This only suggests that the differing interest can not easily be transformed to a unified interest that will satisfy all the demands and interest of different groups.


Recent arguments on the adaptation of IFRS suggest that its standards are designed specifically for developed capital markets which may not be applicable to those developing economies. There is a school of thought suggesting that the standardization of the world accounting standards is not practicable considering the different socio-political and economic environment  as the issue of standard setting is a subject of local politics(, n.d). Moreover, the standards and principles that are appropriate in the western developed countries may be inappropriate or may inflict undue hardships to those developing countries


Also, the IFRS may be seen as a blocking mechanism in which the developing countries that adopt its standards may be prevented from evolving their own standards which is significant in the social, political and the economic environment. Hence, perpetual tendency is likely to be caused by the adoption to the emerging economies. The nature of the socio-economic, political and cultural environment of developing countries require their economies to apply appropriate accounting standards based on their economic problems than merely adopting the standards of advanced economies (, n.d)


Conclusion


 


The objective of having a single accounting standard worldwide is clearly manifested by the IFRS efforts. Indeed, such standards will foster benefits to the global financial market as it introduces a new trend in the area of financial reporting. However, it is also important not to disregard the possible implications of such standardization. Companies who are converting to IFRS are faced with the challenge of changing not only their accounting procedures but the understanding of the real impact of IFRS on their accounting system. Moreover, companies are confronted with the lack of general accepted ways of applying these standards. The IFRS implementation is at its early years and only through continued implementation can a consensus be laid on how to effectively apply it. And as far as adoption is concerned, international standards must be appropriate to the economic problems of the countries worldwide to be truly beneficial.


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