Steps in issuing an IFRS&

Advantages of IFRS

By Deepraj Naiko

• In today’s business, markets are demanding increasing conformity .

• The increasing pace of globalization over recent years has forced the pace for the adoption of truly comparable and consistent international accounting standards.

• The most important change to take place in accounting and financial reporting in years is the convergence (adoption) around IFRS by over 100 countries worldwide.

WHAT IS IFRS?• IFRS, short for International Financial Reporting

Standards, are accounting standards adopted by over 100 countries worldwide.

• These accounting standards are rules of measurements for financial statements that companies issuing stock to the public must provide to shareholders.

• IFRS are intended to be applied by profit-oriented entities to their financial statements in order to provide information financial position, operating performance and cash flow that is useful to decision makers such as shareholders, creditors, employees and the general public

• A complete set of financial statements includes:• Balance sheet • Income statement • Statement presenting all changes in equity or

changes in equity other than those arising from capital transactions with owners and distributions to owners

• Cash flow statement

WHERE DOES IFRS COME FROM?• Many countries had implemented the International Accounting Standards Board

(IASB)’s accounting standards. • With the exception of the United States who maintains its own Financial Accounting

Standards Board (FASB). Both IASB and FASB have created IFRS and US Generally Accepted Accounting Principles (US GAAP) respectively.

• First adopted in 2001, IFRS includes many of the International Accounting Standards (IAS) previously set by the IASB with the objective of improving the level of transparency of companies’ finances.

• The first standard issued by the IASB was IFRS 1, ‘First-time adoption’, and the most recent standard to be issued was IFRS 8 ‘segment Reporting’.

• While the impact of the adoption of the IFRS on company accounts varies between countries, the set of standards imposes very strict disclosure requirements on companies.

• Intended to improve the visibility of companies’ liabilities, IFRS requires the full disclosure of pension-related obligations, while executive remuneration visibility is also tackled, with IFRS dictating that stock options granted to executives must be included in the accounts.

• IFRS also has implications for the way companies account for their fixed assets, setting requirements over the fair value of assets.

• The impact of the adoption of IFRS can also have significance in areas such as merger and acquisition strategy, the provision of bank covenants, and distributions.

ADVANTAGES OF IFRS• The first advantage of using IFRS is international comparability.

Switching to IFRS would allow people to see various companies from different parts of the world on the same plane. As willingness to trade increases, cross border investment and integration of capital markets are easier with greater market liquidity and lower cost of capital. Investor bases would increase as the financial reports are becoming comparable. With better information, companies would be able to more effectively allocate their capital.

• The stringent disclosure requirements improve the visibility of

liabilities such as future pension costs and employee stock schemes.

• The adoption of IFRS can provide greater reassurance for investors, credit rating agencies and lenders, potentially giving companies access to lower-cost capital in line with the lower risk.

CONCLUSION• Although an initial look at the conversion would seem

favourable at closer detail ,there are far more complexities to the situation; The goal of the global standard still seems difficult with IFRS. It is also uncertain whether the benefits of joining the IFRS accounting network will overcome the transition costs.

• Aside from the multinational companies, smaller companies will find these costs significantly heavy and they may see little benefit of switching when U;S;GAAP has already proven itself to be of high quality. They also wonder whether the quality will be maintained when they switch to IFRS and whether IASB has resources to do so.