Question

QUESTION 1 The International Financial Reporting Standards (IFRS) are playing an increasingly important role in global financial reporting. What are the benefits and challenges of adopting IFRS to your country? Explain. (20 marks)

Answer 1

International Financial Reporting Standards (IFRS) are common accounting rules which define how a transaction should be reported. It also includes rules about the information to include or disclose on financial statements. It is a unitary set of standards that has helped to solve many problems in the accounting world for organizations, but this system has also been responsible for creating problematic outcomes as well.

Benefits of Adopting IFRS

1. It would create a single set of accounting standards around the world.
Instead of using multiple accounting standards based on the preference of each country where an organization does business, adopting the International Financial Reporting Standards would enable agencies from different segments of the globe to apply the same standards in every transaction. The advantage to find here is an increase in transparency, which would then allow for more accessible cross-border investments. It would decrease the cost of capital while providing higher liquidity during each transaction.

2. It would reduce the time, effort, and expense of preparing multiple reports.
The presence of International Financial Reporting Standards around the world would allow organizations to cut down on the amount of time they spend on preparing their financial statements. There would be fewer costs associated with this work as well since there would no longer be multiple standards and regulations to follow based on where the company is doing business each year. Some agencies would immediately reduce the number of reports they produce from three to just one each year, saving them more time, labor, and money since there is less work to do.

3. It would not be a costly transition in the United States.
Although one of the disadvantages of adopting IFRS is the one-time cost that would impact the economy, the actual expense of transitioning to this global standard is minimal. The total cost for the entire economy of the United States would be approximately $8 billion, which means the average one-time cost to a multinational company would be $3.25 million. Most agencies would save a lot of money if they adopted International Financial Reporting Standards because it would reduce the amount of work it takes to remove errors, meet multiple regulations, and distribute the information effectively. Over 100 countries so far have either adopted or are in the process of adopting IFRS right now.

4. It would make it easier to monitor and control subsidiaries from foreign countries.
Under the current system in the United States, agencies and their subsidiaries must create parallel reports using GAAP and IFRS, which means there is an increased risk of error and additional auditing requirements necessary to ensure compliance. If the International Financial Reporting Standards were to receive adoption in the U.S., then it would eliminate the potential for misunderstandings. It would help shareholders and firms to simplify their investment decisions.

The U.S. has long been the world leader for taking a strong moral stand on financial ethics, with most nations following the same standard as the United States for generations. Now over half of the world is moving in the direction of IFRS, which means it should be strongly considered for implementation for American firms as well.

5. It would follow the same process that many American agencies already follow.
Another benefit to consider with the adoption of IFRS is the fact that many American-based companies doing business overseas are already preparing reports based on this standard. They are producing a simultaneous GAAP report to satisfy domestic regulations while meeting the international rules. By adopting this practice, the U.S. would help many large businesses to stop their excessive work immediately, allowing them to focus on what they do best. This advantage would allow U.S. businesses to be the driving force in the establishment and adoption of international standards once again.

6. It would offer more flexibility in the accounting practices.
International Financial Reporting Standards use a principles-based system instead of one that is based on a philosophy which follows specific rules. That means the goal of each standard in IFRS is to reach a reasonable valuation, and there can be several ways to reach that outcome. This structure gives an agency the freedom it needs to adapt the global system to fit their specific situations, which eventually leads to the production of useful statements that are much easier to read.

Challenges of Adopting IFRS

1. It would increase the cost of implementation for small businesses.
Large businesses would absorb the cost of adopting the International Financial Reporting Standards thanks to their need to produce these reports outside of the U.S. already. Only small businesses which provide local goods and services would receive the brunt of this expense since they’d be forced to change as well. Since there are fewer resources available for SMEs, it would take them more time and effort to train their staff in this method. This process means that it would be the sole proprietors, single-person LLCs, and partnerships which would bear the brunt of this accounting change.

2. It would lead to concerns with standards manipulation.
The flexibility of IFRS can create numerous benefits, but it also creates a disadvantage with this feature. Organizations can choose to use only the methods that they wish to incorporate in their reporting, allowing their financial statements to show the results they desire. This structure makes it easier to incorporate profit or revenue manipulation into the findings, making it easier to hide financial problems that might exist. The International Financial Reporting Standards can even lead to fraudulent activities, like changing the method of inventory valuation to make more income come into the profit and loss statement to make it seem like the company is in a better position than it actually is.

3. It would require global consistency in auditing and enforcement.
The enforcement of the International Financial Reporting Standards can create some disadvantages as well. Although the United States has an effective enforcement policy on its accounting rules, trying to enforce this level of consistency on other member countries can be challenging. The differences in political and economic systems works to reduce the amount of comparability which is available, even if it can improve the efficiency of audits or eliminate information understanding.

4. It would increase the amount of work placed on accountants.
The implementation of a new system of global accounting standards would require a complete revision of the domestic accounting processes and strategies. Although the CFO of each organization would be responsible for this task under most circumstances, the implementation of the new rules would come from the accounting team. These departments are already busy trying to manage the rules and regulations that are in place currently, so they would be asked to continue with their daily work while creating the foundation for this system to receive implementation too.

When you add in the additional training that many accountants would require to stay in compliance with the new rules, determining how continuing education programs would work is an issue that has little clarity at the moment.

5. It would create an adjustment period filled with tumult.
When organizations begin to move from their current accounting standards mandated by the country of origin to the global accounting rules set by the International Financial Reporting Standards, then there is an increased risk of suffering from a costly delay or mistake during the transition period. Since every country maintains their own complex systems of regulations that govern financial reporting without direct involvement with the standards in use, there might still be a requirement to offer multiple reports as well. That means the only difference we see when adopting IFRS globally is a shift in the presentation of what the agencies provide.

6. It would require changes at the educational level as well.
There are numerous business that would feel the financial impacts of adopting IFRS immediately, even though the SEC estimates that about 100 firms are already using this as their primary standard since a majority of their revenue comes from overseas. We must also adjust the curriculum offered at many business schools because the International Financial Reporting Standards are not taught regularly in the United States. Even though it would make cross-border investments much more accessible, it would require a grassroots movement to shift the educational perspective in accounting to achieve many of the benefits listed above.