IFRS: The Journey So Far

The International Financial Reporting Standard (IFRS) is designed as a common global language for the business affairs so that different stakeholders and users can understand and compare the company accounts across international boundaries. The mounting international shareholding and trade are the consequences of IFRSs. The IFRS has particular significance for the companies that have businesses in numerous countries. They are gradually replacing the many accounting standards used by different countries. The IFRS commenced as an effort of harmonizing accounting across the European Union (EU), but the worth of harmonization quickly made the concept attractive around the world. Between the years 1973 and 2001, the international accounting standards were issued by the International Accounting Standards Committee (IASC). On April 1, 2001, the responsibility to set the international accounting standards was taken by the International Accounting Standards Board (IASB) from the IASC. During the first meeting, the existing international accounting standards were adopted by the IASB and Standing Interpretations Committee Standards (SICs). From then, the new standards called the IFRSs were continued to be developed by the IASB (“Knowledge guide to International Accounting Standards”, 2022). The main aim of this report is to discuss about the journey so far of the IFRS along with its challenges and expectation gap. It also discusses about the recent developments in IFRS.  

The IASC which was established in 1973 has moved across many phases of its journey to come to the present stage. In 1995, both the IASC and International Organization on Securities Commission (IOSCO) entered into an agreement to develop a comprehensive core set of standards that the companies could use for conducing cross-border and national listings. Actually, this was because of the increasing recognition of the necessity for the global accounting standards. It led to the formation of the Standards Interpretations Committee (SIC) in 1997. In 1999, proposal was made by the IASC to attain the global accounting standards convergence. In 2000, 30 core International Accounting Standards were accepted by the IOSCO and it led to the recognition of the IASC as a worldwide standard setter. Furthermore, the IASC was reformed as the IASB in 2001. Accordingly, the International Accounting Standards or IAS are now retitled as the IFRS (Das, Pramanik  & Shil, 2009).

In 2001, the IASB was constituted for evolving and prescribing the norms to treat several items to prepare and present the financial statements. In 2003, the IASB published the first IFRS that is IFRS 1: First Time Adoption of International Financial Reporting Standards. In 2004, the standards and interpretations were issued by the Australian Accounting Standards Board (IASB) that all the Australian accounting standards that are equivalent to the IFRS must be adopted from 2005 in the country (Ortega, 2017). In 2005, 36 new accounting standards and 12 interpretations were adopted by the New Zealand’s Accounting Standard Review Board (ASRB) and New Zealand Financial Reporting Standards Board (NZ FRSB). Other jurisdictions that have already adopted the IFRS include Hong Kong, Philippines, Japan, Canada, Egypt and others. At present, the IASB is responsible for publishing the new accounting standards and interpretations (Degos, Levant & Touron, 2018).

IFRS: Recent Developments

In 2018, a significant development for the IASB was to publish a revised Conceptual Framework for Financial Reporting. There are three purpose of this Conceptual Framework. Helping the IASB to develop the IFRS is the first purpose. Assisting the preparers of the financial statements to develop consistent accounting policies is the second purpose. The third purpose is to help all the parties to understand and interpret the IFRS (unctad.org, 2022).

Another key development is the updates on the practical implementation of the IFRS that have been issued recently. These updates have been introduced in four specific IFRSs, which are IFRS 9 Financial Instruments, IFRS 15 Revenue from Contract with Customers, IFRS 16 Leases, and IFRS 13 Fair Value Measurement. Another key development is the IFRS with future effective dates and some other standards. These standards include IFRS 17 Insurance Contracts, definition of business combination, reforming the interest rate benchmarks, cost to fulfill a contract, and financial instruments that have the characteristics of equity (unctad.org, 2022).

Another key development for the IFRS is the introduction of disclosure initiatives. It includes amending IAS 1 for removing barriers for exercising judgments, IAS 7 for enhancing disclosure of alterations in liabilities from financing activities and others. Another major development is the IFRS for the small and medium-sized enterprises. The main aim of this project is the formation of the standards which are custom-made for the small and medium companies (unctad.org, 2022).

One of the most important developments for IFRS in the recent years is the consideration of sustainability reporting in the financial reporting. Over the past three years, the United Nations Conference on Trade and Development (UNCTAD) Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting has been involved to promote further harmonization of sustainability reporting, and the IASB has been working to enhance wider financial reporting to include sustainability reporting (unctad.org, 2022).

The use of IFRS contributes to the transparent, high-quality and comparable financial information, and it has usefulness for the international organizations because it assists the creditors, investors, financial analysts, and other users of the financial statements in a detailed evaluation of their investments’ performance. Businesses that use the similar accounting standards for preparing the financial statements improve transparency and it becomes possible for the users to compare these companies. This aspect has benefit when comparison is undertaken between the companies that are situated in different countries, as these companies may else use varied rules and methodologies to prepare the financial statements. This aspect adds value in the informed decision making process by ensuring greater comparability for the investors and other market participants (Amanamah, 2017).

Value Added by IFRS

Accountability is largely promoted and strengthened by the IFRS standards by the reduction of information gap between the capital providers and the people to whom the money is entrusted. As a source of globally comparable information, the IFRS standards have vigorous significance to the regulators around the world. Greater flexibility is created by the IFRS. Utilizing the principle-based philosophy rather than the rule-based one, IFRS standards adds value by establishing a goal to arrive at a rational valuation with varied ways of accomplishing tasks. As a result, the businesses receive the freedom of adopting IFRS to their precise circumstances, which will lead to more easily readable and useful financial statements (Chen et al., 2019).

The use of IFRS helps the industries in raising capital from the foreign markets at lower cost as IFRS creates confidence in the foreign investors that the financial statements adhere to the globally accepted accounting standards. It also adds value by contributing to economic efficiency by assisting the investors in identifying the opportunities and risks across the world, consequently enhances the allocation of capital. IFRS adds value in this area because using a single and trusted accounting language by the businesses reduces the cost of capital and international reporting costs (Agyei-Boapeah et al., 2020).  

A large number of jurisdictions needs the IFRS standards for all or most of the domestic publicly available companies in their capital markets, but the countries in the United States are going to continue using their own standards. It is difficult to achieve the convergence between the IFRS and US GAAP because of the technical challenges involved in this convergence as IFRS is principle-based and US GAAP is rule-based which requires considering many details to apply it in the accounting transactions (Guillaume & Pierre, 2016). Even though there are challenges, IFRS adoption will continue be beneficial for the companies as it enhances the standings of the listed-companies and increases their investment appeal.

Under the use of IFRS, the accountants will be required to use their accounting judgments more. Most of the accountants often considers the financial reports as a compliance exercise rather than a valuable tool to establish communication with their stakeholders. This contributes towards many ‘boilerplate’ disclosures where many words and standards are repeated by the accountants instead of telling how actually the company is doing. Therefore, the standard-setters will be required to do something to change this mindset and behavior of the companies reporting and auditor practicing under IFRS. It is a thought process to form judgments for the accounting and reporting purposes, and IFRS being the principle-based standards needs using sound judgments. Therefore, the accountants will be needed to use judgments more frequently under the IFRS-based financial reports (Prather-Kinsey, Boyar & Hood, 2018).

Future Prospects of IFRS

Since a large complexity is involved in the IFRS reporting, and some of the countries may be discouraged to fully embrace the IFRS standards because of this complexity. However, IFRS will be needed to pursue minimizing the needless complexities in its standards and hold fast to the vision of principle-based accounting standards requiring a rational level of judgment (icaew.com, 2022).

A number of reasons are there for which it is challenging for the countries to adopt or comply with IFRS. This highlights the concept of whether ‘one size fits all’ accounting standards have true suitability or feasibility internationally. Undoubtedly, the biggest challenges to adopt IFRS are cultural differences and nationalism. For instance, it is not comfortable for some countries to lose the standard-setting independence to the IASB and they are less motivated to adopt IFRS if they feel that the present composition of the IASB is not serving their interests. In addition, religious laws like Islamic banking have contributed to the modified accounting procedures concerning lending. It is leading to the countries with majority of Muslim population following alternative banking laws that cannot be directly compared to the firms following IFRS standards. As a result, the main objective of adopting the uniform accounting standards is breached (Trimble, 2017).

Assumed that the financial statements users across the country have different demands, the issue to attain the correct level of complexity cannot be ignored. The IFRS standards, particularly when associated with US GAAP, continue to get more complex with very amendment and update. This complexity is oftentimes not appropriate to the emerging and developing countries with less-sophisticated and smaller businesses. As a result, the implementation cost of the IFRS standards may offset the benefits derived from IFRS. Due to the increase in costs, countries will large accounting distances are less motivated to fully implement or adopt the IFRS (Trimble, 2017).

One single set of accounting standards is not able in reflecting the differences in national business practices ascending from differences in cultures and institutions. In the countries which have high quality of governance institutions, the adoption of IFRS standards is likely to be challenging because high switching and opportunity costs of adopting international accounting standards are represented by the high quality institutions. Other challenges include the absence of applicable precise knowledge and applied experience, necessity of training and consultancy services, challenges faced in fair value accounting, and high training costs (Bahad?r, Demir & Öncel, 2016).

In many cases, analyzing the aspects like investment targets, acquisitions or competitors requires comparing the financial statements under two distinct accounting regimes. Since the results under IFRS and US GAAP can be different, it fails to provide the required correct information to make the appropriate acquisition decision. IFRS has a key role to play in reducing the expectation gap of the stakeholders regarding the recognition of revenue. This is because the coming changes in the rules under IFRS would be able in alleviating the perversities involved in the revenue recognition practices currently followed (hbr.org, 2022). In case of unofficial earnings measures, businesses of all types are employing the non-IFRS measures for a long time, such as EBITDA. The managements are needed to disclose the reasons or rationales behind including the non-IFRS measures as these measures largely fail to fulfill the expectations of the stakeholders to disclose the relevant information. This expectation gap can be fulfilled by reconciling the non-IFRS measures to IFRS measures to disclose the required information on earnings.

Fair value measurement is such an area that creates a lot of dissatisfaction among the stakeholders because of the lack of disclosure of such information. However, an active role is played by IFRS 13 that is a new standard setting out a single IFRS framework to measure fair value and disclosing all the relevant information (hbr.org, 2022). There is always a possibility that a company might underprovision or deliberately delaying the recognition expenses or loss in the present year. Recent alterations in the IFRS standards have made these activities less harmful than they used to be (hbr.org, 2022). Therefore, it can be seen that the standards and rules of IFRS play a large part in reducing the expectation gap of many stakeholders.

Conclusion

The above discussion shows that the IASB is responsible for publishing the IFRSs which are used by the companies for the purpose of financial reporting. There has been some key developments in IFRS in the recent years, such as amendments in the accounting standards, future key accounting standards, financing reporting standards for small and medium-sized companies, sustainability reporting and others. IFRS adds value by enhancing the comparability and transparency of financial reporting as companies across the border can use the same accounting standards. There are also challenges involved in IFRS. Cultural differences and nationalism pose the key challenges in the adoption of IFRS standards. At the same time, the IFRS standards have a key role to play in reducing the expectation gaps of different stakeholders. The recent changes in IFRS play key parts in reducing this expectation gap.

References

Agyei-Boapeah, H., Machokoto, M., Amankwah-Amoah, J., Tunyi, A., & Fosu, S. (2020, July). IFRS adoption and firm value: African evidence. In Accounting Forum (Vol. 44, No. 3, pp. 238-261). Routledge.

Amanamah, R. (2017). Benefits and Challenges of International Financial Reporting Standards Adoption in Ghana: Accounts and Business Managers’ Perspective. International Journal Of Accounting And Financial Reporting, 7(2), 178. doi: 10.5296/ijafr.v7i2.12040

Bahad?r, O., Demir, V., & Öncel, A. G. (2016). IFRS implementation in Turkey: benefits and challenges. Accounting and Management Information Systems, 15(1), 5-26.

Chen, C., Lee, E., Lobo, G. J., & Zhu, J. (2019). Who benefits from IFRS convergence in China?. Journal of Accounting, Auditing & Finance, 34(1), 99-124.

Das, B., Pramanik, A. K., & Shil, N. C. (2009). Harmonization of accounting standards through internationalization. International Business Research, 2(2), 194-201.

Degos, J. G., Levant, Y., & Touron, P. (2018). The history of accounting standards in French-speaking African countries since independence: The uneasy path toward IFRS. Accounting, Auditing & Accountability Journal.

Guillaume, O., & Pierre, D. (2016). The convergence of US GAAP with IFRS: A comparative analysis of principles-based and rules-based accounting standards. Scholedge International Journal of Business Policy & Governance, 3(5), 63-72.

ICAEW. (2022). The future of IFRS: Information for Better Markets Initiative. Retrieved 1 March 2022, from https://www.icaew.com/-/media/corporate/files/technical/financial-reporting/information-for-better-markets/ifbm-reports/future-of-ifrs.ashx

Knowledge guide to International Accounting Standards. (2022). Retrieved 1 March 2022, from https://www.icaew.com/library/subject-gateways/accounting-standards/knowledge-guide-to-international-accounting-standards

Ortega, X. (2017). A review of IFRS and US GAAP convergence history and relevant studies. International business research, 10(9), 31-38.

Prather-Kinsey, J., Boyar, S., & Hood, A. C. (2018). Implications for IFRS principles-based and US GAAP rules-based applications: Are accountants’ decisions affected by work location and core self-evaluations?. Journal of International Accounting, Auditing and Taxation, 32, 61-69.

Review of current developments in international standards of accounting and reporting in the public and private sectors. (2022). Retrieved 1 March 2022, from https://unctad.org/system/files/official-document/ciiisard90_en.pdf

Trimble, M. (2017). The historical and current status of IFRS adoption around the world. University of Mannheim, 1-56.

Where Financial Reporting Still Falls Short. (2016). Retrieved 1 March 2022, from https://hbr.org/2016/07/where-financial-reporting-still-falls-short