IFRS Impact on Financials
IFRS is important to cross-border investors for them to comprehend financial statements, which are prepared by a foreign company using their individual countries' accounting standards. The global investment community achieves greater efficiency and uniformity, especially it concerns majorities of public companies domiciled in the European Union (EU) countries where they are required to adhere to the IFRS, which started in early 2005. Certified Public Accountants (CPAs) should help their clients and employers in the preparation for the effects of the EU requirements in financial reporting (Hassaan, 2013). Every nation is moving towards the adoption of IFRS. The EU requires the member states to conform to the IFRS, while Canada and the US are conforming their Financial Reporting Standards (FRS) and GAAP versions to the IFRS. Elsewhere, companies in other countries are accepting these IFRS voluntarily.
The CPA are expected to help their employers and clients assess the impacts of these requirements on their companies. These practitioners are required to offer sufficient explanation to their companies’ management of the effects of the IFRS on their overall financial reporting obligations. Most jurisdictions require their public companies to comply with these standards for stock-exchange listing. Additionally, insurance companies, stock brokerages, and banks use them in the preparation of statutory reports. The IFRS use is not the preserve of public companies or financial reporting. Many lenders and governments as well as regulatory bodies expect the IFRS to adhere to the nations’ financial reporting standards.
The Financial Accounting Standards Board (FASB) is known among the CPAs as the most respected designated accounting reporting organization within the expansive private sector. It establishes financial reporting and accounting standards. Conversely, the International Accounting Standard Board (IASB) is a privately funded and independent standard-setter that is committed to the development of high quality, enforceable, and understandable worldwide accounting standards with the public interests at heart. It is especially so in the preparation of comparable and transparent comparable information for general-purpose financial statements. IASB cooperates with nations’ accounting and reporting standard setters, including the FASB to attain convergence of the GAAP and the IFRS. The implementation of the IFRSs has affected the preparation of companies’ financial statements in the sense that they must adhere and conform to certain set international standards.
The IFRS has harmonized accounting standards across the EU and has gradually become adopted across the world. The International Accounting Standard Board (IASB) continues to develop new-fangled IFRS. Companies are expected to prepare their financial statements in a manner that demonstrates their financial performance and financial position. The aim of these financial statements is the provision of information regarding the entity’s cash flows, financial position, and financial performance to enable the users’ economic decision-making. Financial statements demonstrate management’s stewardship in terms of utilizing the resources at their disposal. To accomplish this chief objective, an entity is supposed to provide information concerning its liabilities, assets, expenses, and income, including losses and gains, equity, cash flows, contributions by owners, and distribution of dividends or profits to the owners.
The implementation of the IFRS requires companies to prepare their financial statements in compliance with these standards showing a fair representation of these records. The IFRS provides a framework that defines and recognizes a universally accepted meaning of expenses, incomes, liabilities, and assets. In furtherance of these objectives, companies are expected to present financial statements according to the going concern principle lest the management intends to wind up the entity or even cease trading. Accounting should be done on an accrual basis so that the entity recognizes items such as equity, expenses, income, liabilities, and assets to satisfy the IFRS recognition criteria and definition. Again, companies implementing the IFRS are expected to prepare similar items separately according to the materiality concept. All items in the same category, if material, should be aggregated together (Hassaan, 2013).
The IFRS forbids offsetting. However, companies implementing the IFRS are supposed to adhere to set standards when offsetting. It is so in the case of the International Accounting Standard (IAS) 19 that relates to the accounting of benefit liabilities. The IAS 12 regulates deferred tax assets and liabilities net presentation. Companies are required to prepare financial statements at least once annually. However, the IAS 34 that relates to financial reporting in an interim period requires that listed companies prepare and publish interim statements. The IFRS requires companies to provide comparative information. This is so for trend analysis. The IAS 1 requires that an extra balance sheet is prepared when a company either applies its accounting policies retrospectively or makes retrospective items restatement. Classification and presentation of financial statements should be retained from one particular period to the other. This is unless it is so apparent that due to an important and substantial change in the operations of a company or a review of the financial statements demonstrates that a dissimilar classification or presentation is more appropriate.
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Companies implementing the standards are supposed to ensure that their financial statements provide faithful representation and relevance (materiality). These salient features should be further enhanced by qualitative characteristics such as comparability, comprehensibility, timeliness, and verifiability. Companies in most countries like Hong Kong, Malaysia, Russia, India, South Africa, Pakistan, Turkey, Singapore, Chile, and other GCC and EU countries are expected to comply with the IFRS. By August 2008, over 113 countries across the world, including all European countries, permit or require the IFRS reporting. About 85 of them require the IFRS reporting in the listed and all domestic companies. The IFRS adoption across the world will benefit users of financial statements and investors and thus reduce comparison costs for alternative investments and bolster information quality. Companies will benefit in the sense that they will receive funding from investors. Besides, companies with higher international activity levels will benefit from a switch towards the use of the IFRS. Moreover, companies involved in numerous foreign activities stand a chance of benefiting from investments due to enhanced comparability of financial statements.
Ray Ball (2007) however argues that implementation of the IFRS will have costs since their implementation may be lax. Further, accounting regional dissimilarities may equally become obscure behind labels. The emphasis on fair value, as well as influencing non-common law area accountants is also a point of concern for companies implementing the IFRSs. Losses in such regions may be recognized in a not-so-timely manner. To check the progress of the IFRS, the IFRS Foundation has sought to develop and post profiles regarding the IFRS use in specific jurisdictions. Today, over 124 jurisdictions’ profiles are complete. This includes all G20 jurisdictions and over 104 others. The adoption of the IFRS has drastically changed the manner and way in which the financial statements for companies are presented, prepared, and reported since capital markets globalization require unified global accountancy and disclosure standards. This is due to increased cross-border flows of capital (Ramirez, 2007).
Foreign Direct Investments (FDI) has also been on the increase through acquisitions and mergers, especially in this globalization era. This has occasioned worldwide standards acceptance. In April 2001, the IASB adopted the IFRS framework. These standards were then adopted by almost 90 countries across the world. Towards this end, companies across the world are expected to ensure seamless migration towards the IFRS framework. The IFRS implementation has innumerable transition costs that companies will incur while adjusting their accounting systems and updating internal controls procedures as well as documenting them. Companies will be required to prepare financial statements annually and it may be three years for Securities and Exchange Commission (SEC) listed companies. They also are required to hire external consultants to train employees as well as familiarize investors and analysts with the IFRS. Companies, which are listed within the EU, including those in Germany, France, and the UK, have already adopted these standards (Ramirez, 2007).
The US allows its companies to adopt the IFRS voluntarily. By January 2011, every listed company in Canada was expected to comply with the IFRS. International convergence towards the IFRS is an ongoing process. Japan, for instance, has allowed its multinational companies to prepare financial statements according to the IFRS. Companies implementing the IFRS lower accounting risks usually associated with the preparation of financial statements according to local GAAP (Ball, 2007). However, the fair-value concept is advocated by the IFRS and this may culminate in accounting subjectivity where asset valuation is not freely traded. If the costs of such assets do not arrive correctly, the purpose of the financial statements may be distorted (Kumar, 2012). Local accounting bodies have the responsibility of carrying out sufficient efforts that will enable companies to adopt the IFRS. However, companies should be prepared to incur substantive lowered costs when implementing the IFRS due to the changes expected. It will ensure that they derive long-term benefit accruing from the use of the IFRS in financial transactions.
The US subsidiary companies operating in the EU jurisdictions, which accept the IFRS, will be forced to conform to these standards. For instance, the US GAAP does not require parent companies and their subsidiaries to conform to accounting policies. However, the IFRS IAS 27 requires parent companies to present consolidated financial statements for their subsidiaries. The adoption of the IFRS by companies will help in bridging dissimilarities in the presentation and preparation of financial statements in different countries (Johnson, Holgate, & PWC, 2008). The IFRS harmonizes accounting regulations, accounting procedures, and standards relating to financial statement presentation and preparation. For this reason, the IFRS provides standards as well as interpretations adopted by the IASB. The IFRS consist of the IAS, International Reporting Interpretation Committee (IFRIC), as well as Standing Interpretation Committee (SIC).
IFRS 1 guides companies adopting the IFRS for the first time. IFRS 2 regulates share-based payments, IFRS 3 relates to business combinations, IFRS 4 to insurance contracts, while IFRS 5 regulates non-current assets that are held as well as discontinued operations. IFRS 6 was adopted in July 2009 and seeks to regulate exploration and evaluation for companies dealing with mineral resources. IFRS 7 deals with financial instruments disclosures, IFRS 8 works with operating segments, and lastly IFRS 9 relates to financial instruments (Zingel, 2006). Companies will add extra financial personnel familiar with the IFRS. In the globalization era, businesses’ national identity will be lost. It is evident that the implementation of the IFRS has and will continue to affect the financial statements for companies. The IFRS adoption will result in transparent, comparable, and high-quality financial statements. If a company is to adopt the IFRS, it can enjoy the benefits of getting capital from abroad.
In conclusion, the IFRS adoption will enable companies to present high-quality financial statements as well as conform to global standards. This is because most countries’ GAAP are not satisfactorily lucid and comprehensible. Additionally, comparison becomes easier when companies have foreign competitors. Companies with subsidiaries in countries permitting the IFRS can use a single accounting language that is possible companywide. This essay has shown that the adoption of the IFRS will enable investors to make informed investment decisions and bolster financial statements comparability. National accounting boards will alert and educate local companies on the best IFRS for enhanced financial reporting practices. This breeds improved and higher standards of financial disclosures. Further, it attracts and monitors listings of foreign companies. This essay has demonstrated that companies will have to be prepared to incur additional costs relating to IT system upgrading.