What is IFRS?
International Financial Reporting Standards (IFRS) is a set of accounting standards, developed by the International Accounting Standards Board (IASB) that is becoming the global standard for the preparation of public company financial statements.
Worldwide Adoption of IFRS
From the past few years many changes have been seen by many in finance and accounting sectors. Today it is observed that many major economies in the world are under way to adopt IFRS. Nearly 100 countries have adapted their local accounting standards to conform to IFRS.
It is under practice that many nations developed their own local Generally Accepted Accounting Principles (GAAP). The advent of IFRS has brought with it the choice of adopting a globally accepted set of standards instead of using local GAAP.
But why is IFRS so important and why is convergence of accounting standards so advantageous or even necessary?
International Financial Reporting Standards remove some of the subjectivity from financial reporting and provide a consistent basis for recognition, measurement, presentation and disclosure of transactions and events in financial statements. In recent Past, there have been cases where companies reporting under IFRS in Europe record a loss but when these same companies re-state their accounts according to US GAAP they record a profit!
Financial statements are prepared based on a number of accounting principles and assumptions. Accountants use their judgment to apply these principles and produce financial statements for use by management, shareholders, analysts, finance providers, governmental agencies, the general public and other stakeholders.
Why is the World looking at IFRS?
Convergence of accounting standards will have the effect of attracting investment through greater transparency and a lower cost of capital for potential investors. In recent times Companies are finding it increasingly difficult to raise money and get them listed on stock exchanges as they were not following the standard in accordance with IFRS. Differences in accounting practice make it difficult for investors, whether individual or institutional, to compare the financial results of different companies and make investment decisions.
To Whom It Benefits
Multinational companies will find it easier to comply with reporting requirements of overseas stock exchanges since they would no longer have to re-state their accounts.
Governments will be in a better position to assess the tax liabilities of multinational companies receiving income from overseas as well as for foreign multinationals setting up shop in their own country.
In 2005 the European Union formally adopted IFRS as the single accounting standard throughout their member countries. Australia, Russia, China, South Africa and the GCC nations have already converged or are in the process of converging with IFRS. Canada has committed to adopting IFRS by 2011. Japan, India, Brazil and Mexico are also pursuing convergence or adoption of IFRS.
In 2007 the US Securities & Exchange Commission made the landmark decision to allow non-US companies to file their financial statements based on IFRS without reconciling back to US GAAP. This is widely regarded as the most significant step by the SEC towards full adoption of IFRS in the not too distant future. This change by the SEC is an effort to reduce the barriers to capital flows between countries using IFRS and US GAAP.
The IASC expects that by 2011 more than 150 countries will have adopted IFRS including the US which is expected to at least have converged with IFRS to a great extent either by changing US GAAP or adopting IFRS outright.
Who gets affected by the change?
A country’s intention to adopt IFRS or converge with IFRS is highly admirable and to be applauded. However, the accounting profession, governments, regulators, national accounting standard setters, and other constituents must continue to work together to eliminate differences between national and international standards. The principal actions needed to support convergence are outlined below.
v The Accounting Profession needs to assist governments and standard setters in formulating and enacting convergence plans, provide IFRS training and education and support the preparation of national language translations of IFRS.
v Governments must establish formal convergence plans that include target dates for implementation and address impediments to convergence, for example the link between financial accounting and lax legislation.
v Regulators should set up efficient and effective enforcement mechanisms to increase the consistency and quality of application of IFRS as well as support the International Financial Reporting Interpretations Committee (IFRIC) and the IASB as the sole clearing house for interpretation of IFRS.
v National Standard Setters must decide on a strategy and timetable for achieving convergence and develop an active standard setting agenda aimed at eliminating existing differences with IFRS.
v The IASB is required to address concerns about the complexity and operational practicality of IFRS, prioritize the SME project as an agenda item and oversee and authorize translations of IFRS in various languages.
v The Preparers of financial statements must actively participate in the standard setting process, in particular to identify practical application concerns, as well as providing IFRS training for staff and managers, including those in non-financial roles.
v Universities need to include IFRS in the core accounting curriculum.
v Analysts and Investors are required to promote convergence of national accounting standards with IFRS. They should also actively participate in the IASB’s standard setting process, in particular to identify users’ needs, and educate their staff regarding the IFRS reporting model.
SEC offers roadmap to global accounting standards
The Securities and Exchange Commission has proposed roadmap that could lead to the use of international financial reporting standards (IFRS) by U.S. issuers beginning in 2014. Currently US Companies are using US Gaap. In 2011 SEC would make a final decision whether to adopt IFRS.
“An international language of disclosure and transparency is a goal worth pursuing on behalf of investors who seek comparable financial information to make well-informed investment decisions,” said SEC Chairman Christopher Cox. “The increasing worldwide acceptance of financial reporting using IFRS, and U.S. investors’ increasing ownership of securities issued by foreign companies that report financial information using IFRS, have led the SEC to propose this cautious and careful plan. Clearly setting out the SEC’s direction well in advance, as well as the conditions that must be met, will help fulfill our mission of protecting investors and facilitating capital formation.”
The transition from GAAP to IFRS is not only inevitable, but a positive development that would help make capital markets more competitive. Transitioning to IFRS would allow companies to compete for capital in other countries, while reducing cost and complexity for companies operating internationally; we also think that embracing a single set of global accounting standards would contribute to a higher degree of investor understanding and confidence. Also IFRS is very important for US Investors as they own 2/3 rd of securities issued by foreign companies. Because of IFRS there will be greater comparability and greater confidence in the transparency of financial reporting for the US investors
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The contents of this post are personal statements or opinions expressed by Winni Sharma, Senior Manager, ICS Inc. They must not be construed as financial, investment or taxation advice.