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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. 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.
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. 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. 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 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. It would not reduce the home-court advantage for the modern firm.
Although there are some shareholders who would be more inclined to support foreign businesses if we adopt IFRS, there is no guarantee that this would happen throughout every demographic. Authors Teri Yohn and Messod Beneish found that there is a home bias effect still in place after adopting the International Financial Reporting Standards internationally.
The most mentioned factor about the advantages of IFRS has been the standardization of financial reporting which eventually improves the comparability of financial statements in major financial markets. This also removes the trade barrier, as this was one of the key factors as why the EU has been trying to adopt single reporting standards. This factor can also be mentioned as one of the crucial advantages of converting to IFRS as it makes the EU member countries to be consistent not only on macroeconomic aspects, but also on financial reporting which improves relationship between investors and companies among member countries.
As thousands of companies in Europe and other joining countries across the world has already created a huge base for IFRS adoption, it also improves the companies to access to financial markets by having the financial statements prepared under one reporting standards.
One of the main reasons for converting from previously used GAAP to new IFRS was for improving comparability in international financial markets, thus increasing the focus on investors. And this has been mainly achieved and still going to be achieved as more and more countries around the world have been converting to IFRS from their national reporting standards as mentioned during the interview. However, the comparability of financial statements get worse if the same country uses two different sets of reporting standards, thus IFRS and national reporting standards.
Due to the gap between the market and book values, the local stock market gets adversely affected when the IFRS is applied in line with other national reporting standards. Moreover, there has been no significant achievement in terms of usefulness and improved comparability of financial statements in the short term which is mainly due to the fact that the IFRS reporting standards is fairly new as a reporting standard and the harmonization has not fully been achieved yet by all EU member countries.
And it is hoped that the usefulness and improved comparability of IFRS may be achieved in the medium-long term. Another reason why the U. S is not adopting IFRS is the lack of superior standards. Till this happens, the country would like to stick to GAAP. From Wikipedia , the free encyclopedia. IFRS 2 is an international financial reporting standard issued in February Is IFRS difficult? What countries do not use IFRS? And then there were seven. The U. What is IFRS 9 in banking? The classification and measurement of financial assets.
Principles can act as guidelines on how to conduct reporting but rules clearly delineate what is and is not allowed. I do believe that a broad basis lends itself to more interpretation than actual execution, which is a disadvantage when it comes to litigation. More to the point, the majority are not sophisticated enough to think critically about principles. It is far more productive to have them attack or defend based on rules.
Rules and form are what got us into this mess. Rules just set the boundaries that companies work around Ref Enron. A principle has no boundary. Again it is going to happen whether we like it or not so we had better prepare for it. Disclosed policies are a way of communicating the basis of our judgements and how we calculate amounts etc. If Principles is the general approach, then significant disclosure requirements should be enforced to help investors understand the principles underlying management and accounting decisions and the impact those principles based decisions have had on financeial statement and footnote disclosures.
I agree with what you are saying in substance. I long for the return of principles as the basis for deciding how to best reflect the nature and substance of business transactions. It is important to note however, that there is a need for a solid decision framework is the basis for those principles based decisions.
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