Many companies over the world assumed IFRS not to be irrelevant for them. That was until they saw potentials for cross-border payments emerging. The recent pandemic has created conditions ripe for global mergers and acquisitions (M&A) activity. But what do they signify for your business? And how can you convert to IFRS?
What is IFRS?
IFRS stands for International financial reporting standard. It is a set of accounting standards and rules that defines how accounting events should be reported in the financial statements of your business. IFRS is disseminated by the International Accounting Standards Board (IASB). The core goal behind IFRS was to create transparent, comparable, and consistent financial statements across the world.
Around 166 jurisdictions have adopted IFRS already, including, US, India, UK, Mexico, Japan, Denmark, China, Colombia, etc. And out of these 166 jurisdictions, 156 have publicly announced their support for IFRS.
Why does IFRS matter?
With a wide range of businesses seeking opportunities for investments around the world, cross-border payments have become standard than it was ever before. More than one-third of the financial transactions occur across borders and that number is anticipated to grow in the upcoming years.
Previously, cross-border payments were hampered by differences in adding costs, accounting standards, business deals risks, and complexity maintained by different countries. And implementing national accounting standards for different countries described that the reported amounts in the financial statements may be differently calculated.
However, with the rise of IFRS, these sorts of problems have been eliminated by ensuring the adoption of the same globally accepted standards of accounting standards.
IFRS vs GAAP
The U.S. based public companies ought to use an opponent system, the Generally Accepted Accounting Principles (GAAP). These standards were developed by the Governmental Accounting Standards Board (GASB) and the Financial Standards Accounting Board (FSAB).
The Securities and Exchange Commission (SEC) had said it won’t switch to IFRS completely but will continue to review a proposal and allow IFRS information to be supplemented U.S. financial filings.
A few differences among IFRS and GAAP are as follows:
- Conceptually IFRS is considered more of principle-based standards for accounting than GAAP ( that is more rule-based).
- Under IFRS, an inventory write-down can be reversed in future only if specific criteria are met while under GAAP, any reversal is prohibited once the inventory has been written.
- Under IFRS, the last-in, first-out (LIFO) accounting method for inventory costs cannot be used, while, under GAAP, either first-in, first-out (FIFO) or LIFO accounting methods for inventory costs can be used.
Pros and Cons of IFRS
As with any other accounting method, the adoption of IFRS also has some pros and cons. So in this section, we will first check the advantages of IFRS adoption rather than its disadvantages.
Pros of IFRS Adoption
Here is the list of advantages of IFRS adoption:
- IFRS would make a single set of accounting standards across the world.
- IFRS would make it easier to observe and control subsidiaries from foreign countries.
- IFRS is not a costly transition in the US.
- With IFRS comes more flexibility in accounting practices and higher return on equity.
- IFRS can help in reducing the effort, time and expense of preparing multiple reports.
- Needless to say, IFRS will make it easier for enterprises to do business in foreign countries.
- IFRS brings transparency by enhancing the quality and international compatibility of financial information.
- IFRS standards also boost responsibility by minimizing the knowledge gap among the money provider and individuals with whom they have entrusted their funds.
Cons of IFRS Adoption
Now that we have seen the advantages that IFRS offers, let’s check the disadvantages that come with the adoption of IFRS.
- The cost of implementation of IFRS for small businesses will increase.
- IFRS adoption will lead to standards manipulation concerns.
- IFRS requires consistency in auditing and enforcement across the globe that can be difficult to achieve.
- IFRS would increase the work amount for accountants.
- Changes in the educational level will also be needed to understand the IFRS adoption across companies.
- Most importantly, global acceptance for IFRS is also necessary to make it useful.
Conclusion
IFRS fosters transparency, efficiency, and trust in the global financial markets and the companies that put their stakes on them. IFRS can help investors to analyze companies by easily comparing fundamental analysis of one company with another. Moreover, among 49,000 domestic listed companies on the 93 major securities exchanges in the world, over 29,000 already use IFRS standards.