International Financial Reporting Standards

Introduction

Accounting is a very complex activity, which requires unity of all involved parties in order to receive converged and well-matched results. In order to accomplish the goal of having the same way of preparing and presenting the financial statements, there is a need to develop mutual role and objectives. There exist certain bodies responsible for designing such principles and it is recommended that many countries adopt such rules. IFRS and GAAPs are the accounting principles that companies use while preparing their statements. GAAPs are based in the United States, while the IFRS are used in most European Union countries and other 110 countries worldwide (IASB, 80). IASB is the authorized body that prepares the principle in IFRS and is designed to change and implement them in accordance with the market structure. All of such areas have their history of development and differences. The IFRS has its current status and the future perspective, which it wants to achieve in the coming years (FASB, 705-740). Current paper discusses in details the nature and perspectives of such accounting principles and their designing bodies.

History of IASB and International Financial Reporting Standards (IFRS)

In the late 1950s after the World War II, cross-border countries engaged themselves in trade where they exchanged goods and services for money. However, despite such trading, the companies worked in a very local manner where the books of accounts from a client of a particular country were different from the ones in a cross-border country. Major capital markets in the world had the need to have similar or identical principles that would guide them in the accounting process. In the need for harmonization of such accounts in the capital markets, an International Accounting Standard Committee (IASC) was formed in 1973, which designed the codes. In 1990s, the term harmonization was changed to convergence that resembles the accounting field, as well as an accounting term. The year 2001 was a great year in the accounting where the convergence principle was recognized. An international accounting standards board was designed in the year 2001, and it is taking effect in the accounting field nowadays. More than a hundred countries and the European Union permitted the use of International Financial Reporting Standards, which originates from IASB.

Between the year 1973 and 2001, IASC issued the International Accounting Standards (IAS) which are the codes of ethics for accounting. After 2001 IASC had changed to IASB and the term and initials IAS were changed by the board. Though the standards are still called IAS, the official term concluded was International Financial Reporting Standards (IFRS).

Examples of Differences in GAAPs and IFRS

General Accepted Accounting Principles (GAAPs), are accounting principles and standards used mainly in the US. Though they perform the same activities, GAAPs and IFRS has some differences.

Comparison between the US GAAP and IFRS

Current Status of IFRS and US Financial Reporting

In the US financial reporting, IFRS is not yet fully adopted and the organizations prefer using GAAPs. The platform is entering the organizations, though at a slow pace. However, in other parts of the world, the principles are in operational and convergence of the financial statements across borders takes the form of IFRS. In the G20 countries IFRS is used, where more than other 100 countries are permitted and restricted to using the principles. GAAPs are very dominant in the USA where all the organizations use such system. However, between the year 2007 and 2012, Securities Exchange and Commission (SEC), and provided guidelines that preparation of the financial statements in the stock exchange works according to IFRS (FASB, 705-740). The procedure called to make the method effective is still developing and the incorporated changes will take effect in the future. If the government and the financial boards refuse to enhance or implement the SEC proposal, the companies will continue operating under GAAPs.

Advantages of International Financial Reporting Standards

Here’s a list highlighting the advantages of International Financial Reporting Standards (IFRS), particularly in the context of financial reporting and its impact on international financial activities, including the perspective from the USA:

• Unified Accounting Standards: IFRS provides a single set of globally recognized accounting principles, increasing transparency and enabling easier cross-border investments.
• Streamlined Reporting: The adoption of IFRS simplifies the financial reporting standards reducing the time, effort, and expense associated with preparing multiple reports for different countries.
• Cost-Effective Transition: Transitioning to IFRS in the United States is not expected to be costly, with the overall expense for the economy being relatively minimal.
• Enhanced Comparability: IFRS enhances the comparability of financial statements among companies both nationally and internationally, which can increase investor confidence.
• Improved Quality of Information: The adoption of IFRS has been associated with increased quality of accounting information, making financial statements more transparent and easier to audit.
• Reduced Cost of Capital: By providing a consistent reporting standard, IFRS can reduce the cost of equity capital for businesses operating internationally.
• Facilitated Monitoring and Control: IFRS makes it easier to monitor and control subsidiaries from foreign countries due to the uniformity in financial reporting.

These advantages demonstrate how IFRS can contribute to the efficiency and effectiveness of financial reporting standards on an international scale, including within the USA.

Disadvantages of International Financial Reporting Standards (IFRS)

• Complexity: IFRS can be complex and require specialized expertise to implement effectively, posing challenges for companies, especially smaller ones.
• Cost: Complying with IFRS can be expensive due to the need for new software or hiring outside consultants to ensure compliance.
• Lack of Global Acceptance: Not all countries have adopted IFRS, including the United States, which complicates accounting for foreign-based companies doing business in these countries.
• Flexibility Leading to Manipulation: The principles-based approach of IFRS allows companies to choose methods that show desired results, potentially leading to manipulation of financial statements.
• Potential for Fraud: The flexibility in IFRS could encourage companies to hide financial problems or even commit fraud.
• Increased Costs for Small Businesses: Small businesses may face significant challenges in implementing IFRS due to limited resources, resulting in additional costs for accountants or consultants.

These points highlight some of the challenges and concerns associated with the adoption and implementation of IFRS.

Impacts of IFRS on Quality of Financial Reporting

The adoption of International Financial Reporting Standards (IFRS) has been a significant step towards enhancing the quality of financial reporting globally. One of the primary impacts of IFRS is the promotion of greater transparency and comparability across international borders. This is particularly beneficial for investors and stakeholders who rely on financial statements to make informed decisions. The uniform standards set by IFRS mean that companies in different countries can be more easily compared, reducing the risk of misinformation and fostering a more trustworthy financial environment.

Furthermore, IFRS has been linked to improvements in the reliability and accuracy of financial reports. Studies have shown that the implementation of IFRS reduces the scope for earnings management, leading to more timely loss recognition and value-relevant accounting measures. This shift towards more conservative reporting practices under IFRS can be attributed to its principle-based approach, which requires a higher degree of judgment and estimation, thereby potentially increasing the quality of the information reported.

However, the impact of IFRS on financial reporting standards is not without its challenges. The complexity and cost of implementing these standards can be significant, particularly for smaller firms or those in emerging markets. Additionally, the flexibility allowed by IFRS in certain areas has raised concerns about the potential for manipulation of financial statements. Despite these concerns, the overall trend suggests that IFRS adoption has had a positive effect on the quality of financial reporting, contributing to a more stable and efficient global financial system.

The Future of IFRS and US Financial Reporting

The future of IFRS and the US financial reporting remain uncertain to many public companies. Many countries have adopted IFSR. However, the US is hesitant to adopt such model of global financial reporting. IFSR is considered costly, and most companies might not be able to afford it. The standards produced by IASB are of high quality, but they require further development (IASB 80). The US financial reporting system is expected to become global in the future. Many shareholders think that becoming global is an important factor for their company and it will be combined with the international financial reporting systems.

Adoption of IFRS in the USA has been postponed due to lack of funds. The funding for IFSR is expected to increase in the future. It is expected that IFSR will receive funding from a foreign subsidy, the Congress and seven largest accounting firms. IFSR will institute measures that will safeguard the US capital markets. In the United States, IFSR will focus on developing global financial language that will result in a transparent, high-quality and comparable international financial reporting system. Many companies in the future will adopt IFSR as it helps organizations compare financial report globally. In addition, it will become easier for such companies to trade in the global perspective.

By the passage or acceptance of the law introduced by SEC between the year 2007 and 2012, the United States will adopt the use of IFRS. Anyway, in case the Government or the American Accounting Association Department refuses to implement the above-provided accounting principles, there remains a possibility that IFRS will never be adopted in the US (IASB, 170). The dominance of the GAAPs creates no other option than to implement it and abide by the established rules. In accounting and convergence of the books of accounting and records, the USA cannot be compared to any other countries.

Conclusion

In conclusion, the integration of International Financial Reporting Standards (IFRS) into financial reporting practices has been a subject of considerable debate, particularly in the context of international financial activities and the potential harmonization with the United States’ accounting frameworks. The adoption of IFRS aims to standardize reporting standards across borders, thereby enhancing the quality and comparability of financial reporting. This global convergence could facilitate international trade and investment, providing a common language for financial reporting that benefits multinational corporations and investors alike.

However, the United States’ hesitance to fully embrace IFRS reflects concerns about the practicality of such a transition, given the existing well-established US Generally Accepted Accounting Principles (GAAP). The litigious nature of the US business environment and the demand for specific rules over general principles pose significant challenges to the adoption of IFRS. Despite these challenges, the movement towards a single set of high-quality global accounting standards remains a goal that could reshape the future of international financial reporting, potentially leading to more efficient global capital markets.