Many companies around the world have assumed that they don’t care about IFRS. That was until they saw potential for cross-border payments emerging. The recent pandemic has created the conditions for global merger and acquisition (M&A) activity. But what do they mean 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 define how accounting events should be reported in your company’s financial statements. IFRS are issued by the International Accounting Standards Board (IASB). The main objective of IFRS was to create transparent, comparable and consistent financial statements across the world.
About 166 jurisdictions have already adopted IFRS, including US, India, UK, Mexico, Japan, Denmark, China, Colombia, etc. And of those 166 jurisdictions, 156 have publicly announced their support for IFRS.
Why are IFRSs important?
With a wide range of companies looking for investment opportunities around the world, cross-border payments have become the norm like never before. More than a third of financial transactions take place across borders and this number is expected to increase in the coming years.
Previously, cross-border payments were hampered by differences in added costs, accounting standards, business transaction risks and complexity maintained by different countries. And the implementation of national accounting standards for different countries described that the amounts reported in the financial statements can be calculated differently.
However, with the rise of IFRS, these types of problems have been eliminated by ensuring the adoption of the same globally accepted accounting standards.
IFRS vs GAAP
Public companies based in the United States should use an objection system, 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) has said it will not fully switch to IFRS, but will continue to review a proposal and allow IFRS disclosures to be supplemented with U.S. financial statements.
Here are some differences between IFRS and GAAP:
- Conceptually, IFRS are viewed more as principles-based accounting standards than GAAP (i.e. more rules-based).
- Under IFRS, an inventory write-down can only be reversed in the future if specific criteria are met while under GAAP any write-back is prohibited once inventory has been written.
- Under IFRS, the last in, first out (LIFO) method of accounting for inventory costs cannot be used, while under GAAP the first in, first out (FIFO) or LIFO for inventory costs can be used.
Advantages and disadvantages of IFRS
As with any other accounting method, adopting IFRS also has advantages and disadvantages. So, in this section, we will first check the advantages of adopting IFRS rather than its disadvantages.
Benefits of adopting IFRS
Here is the list of benefits of adopting IFRS:
- IFRS would constitute a single set of accounting standards across the world.
- IFRS would make it easier to observe and control subsidiaries in foreign countries.
- IFRS is not a costly transition in the United States.
- With IFRS come greater flexibility in accounting practices and a higher return on equity.
- IFRS can help reduce the effort, time and expense of preparing multiple reports.
- Needless to say, IFRS will make it easier for companies to do business abroad.
- IFRS provides transparency by improving the quality and international compatibility of financial information.
- IFRS also strengthens accountability by minimizing the knowledge gap between the fund provider and the people to whom they have entrusted their funds.
Disadvantages of adopting IFRS
Now that we have seen the advantages of IFRS, let’s take a look at the disadvantages of adopting IFRS.
- The cost of implementing IFRS for small businesses will increase.
- Adopting IFRS will lead to standards manipulation issues.
- IFRS requires consistency in auditing and application across the world, which can be difficult to achieve.
- IFRS would increase the workload for accountants.
- Changes in education level will also be necessary to understand the adoption of IFRS in companies.
- More importantly, global acceptance of IFRS is also needed to make them useful.
IFRS promotes transparency, efficiency and confidence in global financial markets and the companies that invest in them. IFRS can help investors analyze companies by easily comparing the fundamental analysis of one company with another. In addition, among the 49,000 national companies listed on the world’s 93 major stock exchanges, more than 29,000 already use IFRS.