International Financial Reporting Standards (IFRS)
The IFRS is a set of global accounting standards formulated and issued by the International Accounting Standards (IAS). These standards form a common platform for all businesses across the world. The standards determine how data and financial related information is recorded in financial statements. This aids in synchronizing different modes of financial reporting adopted in different countries. The accounting standards are accepted principles in almost all companies across the globe, and they are used to prepare companies’ annual reports (Greuning, 2011). Annual reports published by companies’ present information on the financial status and worth of a company, which is useful to clients, employees, governments, shareholders, and debtors. Major economies around the globe have also initiated processes for the implementation of accounting standards created by the IFRS. The IFRS standards were initially used as an academic project, which focused on creating a homogeneous set of international standards applicable in all or most economies. This initiative was then adopted and utilized by the European Union (EU). Currently, the EU requires listed firms in Europe stock exchange to use IFRS in financial documents dated January 2005 and for all subsequent reports.
Increased globalization and international trade significantly influence the need for a standardized set of accounting principles that can be applied universally across the globe. Moreover, most economies particularly the developed nations diversify their market base and invest in foreign countries. Thus, increased international connections demand harmonization of business transactions, techniques and operating methods to enhance cooperation, efficiency and productivity. Increased use of these standards has also been observed to increase comparability of financial documents and reports. The acceptance of IFRS as a basis for accounting and financial reporting represents an essential change of the global accounting profession. Furthermore, most countries are adopting these standards with 120 nations currently allowing use of the standards for domestic listed entities (Greuning, 2011). The EU stock exchange requires companies listed in the EU stock exchange to plan their fiscal statements in accordance with IFRS guidelines. New Zealand, Israel and Australia have also adopted the use of these standards.
Standardization of financial reports is, however, accompanied by many challenges. These challenges are associated with diverse political and legal systems, standard setting processes, forms of ownership, capital markets, business activities, cooperative efforts and initiatives and social-cultural values (Greuning, 2011). Societal factors have a significant influence on standards, values, regulations and modes of transactions adopted in a given jurisdiction. The society comprises of explicit and implicit patterns that considerably influence reliability of financial information. These factors influence the ease of adoption of regulatory measures such as the IFRS. The societal diversities include uniformity, flexibility, conservatism, optimism, professionalism, statutory control, transparency and secrecy. For instance, the US and the UK are flexible and liberalized with high professionalism compared to Asian countries, which have uniformity and high statutory control. Furthermore, transparency is highly advocated in some countries than in others. For instance, Japan upholds transparency in most transactions either on an individual level or a corporate level. On the other hand, US oriented transactions usually entail secrecy and retention of information, especially if the information is detrimental to the success of the affected company. Furthermore, the legal jurisdiction of a nation also affects the adoption of standardized regulation. For instance, the legal system in some countries such as Taiwan considers financial obligations and accounting rules to be legally binding whereas, in other countries such as the US, these rules are simply recommendations. Political influence is also another significant factor that determines the ease of adoption of IFRS regulations in different countries. Politics in most nations play a vital role in determining which regulations are adopted and utilized (Greuning, 2011). Countries affected by intense political activities experience difficulties adopting new strategies since politics are highly affected by personal interests and centralized power. Societal factors significantly affect adoption of regulatory policies and their effectiveness particularly regulations that affect the economic welfare of a state.
Adoption of IFRS regulations involves the incorporation of the regulations in the law system. However, implementation of these regulations in the jurisdiction statement may not be effective because the complexities involved with the alteration and amendment of state laws. Moreover, complications arise in cases where the IFRS regulations contradict national laws already in use. Institutions and procedures necessary for effective implementation of IFRS and transition to a set of international accounting standards have also not been implemented (Greuning, 2011). This poses a significant problem in the effective implementation of these regulations across the globe. Moreover, the absence of adequate coordination procedures creates indifferences amongst differing states. In addition, many underdeveloped and developing countries have inferior accounting systems and lack professionalism necessary for effective application of sophisticated standards such as the IFRS. Effective specialized materials and resources are also required for the successful execution of IFRS systems. However, these resources are scarce and expensive to obtain. Moreover, a translated version for different languages is unavailable. Application of these standards requires prior training and practice so as to enhance productivity and efficiency (Greuning, 2011). The lack of resources, professionalism and technical capacity particularly in developing nations poses a significant challenge to the successful execution of IFRS.
The transition process to IFRS requires effective coordination and communication with educators, users and all other stakeholders. Stakeholders should be included in the planning and implementation processes. Formulation of a time-bound logistical framework of objectives is also highly essential as it facilitates the provision of measurable, quantifiable and achievable goals. Considerable preparations on a national and entity level are also essential in promoting clarity and coherence. The size and nature of operations in domestic, economic entities influence the extent of influence and applicability of IFRS. Furthermore, some countries require special consideration particularly if the economies are affected by extreme inflationary situations (Greuning, 2011). Feedback compilation and an analysis of the efficiency of previously implemented IFRS provide information on problematic areas and challenges associated with standards harmonization.
The objective of the IFRS is to ensure that financial reports prepared by companies contain high quality information and accurate representation of the company’s status. The statements should also be transparent and comparable over the periods presented in the accounts documents. Proper documentation and systematic presentation of information also allows for comparison of financial reports and performance among different companies and jurisdictions (Greuning, 2011). Increased interest and intercontinental acceptance of harmonized accounting standards mainly originates from capital markets participants. The use of standardized accounting regulations provides a good platform for comparison and trade between nations in the capital markets trade. Uniform presentation of financial data facilitates effective analysis and decision making. Moreover, it aids the assessment of opportunities by potential domestic and international investors. Moreover, IFRS increases mobility, compatibility and flexibility between different economies thus reducing the expenses involved in translating and modifying financial statements to suit different financial reporting standards.
Reference
Greuning, H.., Scott, D., & Terblanche, S. (2011). International financial reporting standards: A practical guide. Washington, D.C: World Bank.
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