Reasons for the global adoption of International Financial Reporting Standard
Reasons for the global adoption of International Financial Reporting Standard (IFRS)
International Financial Reporting Standard (IFRS) were adopted because of the increasing need for a globally convergent or harmonized accounting standards. Although IFRS has received support globally, some jurisdictions are still hesitant to accept it. This blog address issues that surround the adoption and acceptance of IFRS in the global platform.
The benefits of IFRS to the investors
The financial and economic markets are becoming global. Financial reporting and performance comparison require a standardized and high quality accounting standards. IFRS gives investors an opportunity to rely on single accounting language which makes it easier to interpret companies’ activities. Currently IFRS have been accepted in over 200 jurisdictions and is fully applicable in 85 jurisdictions for domestically listed corporates. Investors of Multinational Corporations can comfortably use IFRS to analyse the performance of the companies across different jurisdictions.
Attractiveness of IFRS as a global accounting standard
The International Accounting Standards Board (IASB) developed IFRS in collaboration with other accounting boards such as FASB, and US-GAAP among other bodies. IFRS is attractive because it is based on the principle aspect of transactions as compared to the rules based GAAP standards. IFRS is more attractive because is addresses the economic relevance of each transaction.
Possible barriers to the global adoption of IFRS
There are several barriers that have been identified as the possible barriers to the global adoption of IFRS accounting standards. First, some users hold that the principle aspect of IFRS makes it too complicated to apply. For Example, US entities fear that the adoption of IFRS would lead to the loss of key information contained under GAAP because they consider the latter as more intensive. Second, IFRS do not provide adequate information to address lease accounting, accounting for insurance entities and revenue recognition. Third, IFRS might fail to support full comparability of entities because some jurisdictions have opted to edit the IFRS accounting principles and standards. Lack of a single accounting body that have been entrusted with uniform adoption and enforcement of IFRS forces forms to apply the established standards differently.
Third, the U.S investors are confused about which accounting standards to use between GAAP and IFRS. The US Securities and Exchange Commission (SEC) have allow given companies to use GAAP or IFRS or both which leads to lack of uniformity. Lastly, adoption of IFRS has been politicised. For instance, full adoption of IFRS in the European Union since its acceptance in 2015 has been hindered by local politics.
An alternative accounting approach
Currently there is no other alternative accounting approach that has been proposed besides IFRS. It would interesting to see how complete harmonisation of the IFRS and GAAP then converging them into a single accounting standards would reduce the current complexity and confusion. However, the harmonisation should not be rushed. The investors and other users should be given adequate time to learn and understand the IFRS language.