Ifrs Advantages and Disadvantages
In 1999 the Europeian Commission presented its financial services action plan, the implementation of which should contribute to the unification of integrated market for financial services in the EU by 2005. In the areas of financial reporting the action plan proposed that all listed companies report under the same accounting framework (Interdisciplinary journal of contemporary research in business, April 2011, Vol. 2 No12). International Financial Reporting Standards (IFRS) promises transparent, comparable and consistent financial information to guide investors in making optimal investment decisions (Jacob & Madu, 2004).
IFRS are standards and interpretations adopted by the International Accounting Standards Board (IASB). IFRS were adopted in 2001 by the European Union and all stock exchange listed companies were required to use them for reporting purposes after the start of fiscal year 2005 (Soderstorm & Sun, 2007, p. 675). This paper will consider the advantages and disadvantages of IFRS. Theory: Advantages of IFRS There are several advantages that have been presented in public forums, scholarly articles, news accounts, and other places where discussion of public issues are conducted.
A discussion of some of the major advantages follow: IFRS promise more accurate, comprehensive and timely financial statement (International Accounting Policy forum, 2006); this means that all accounting information must be relevant, reliable, comparable, and consistent. For information to be relevant, it needs to be significant enough to influence business decisions. The information should help confirm or correct users’ expectations. However it must be timely to be relevant. (Jane L. Reimers, 2011, p . 53) When the information is reliable, you can depend on it and you can verify its accuracy (Jane L.
Reimers, 2011, p . 53) . In order to be reliable the information in the financial statements must be a faithful representation of what you want to accomplish, otherwise it could mislead investors. Comparability means that investors will be able to compare the corresponding financial information between two similar companies(Jane L. Reimers, 2011, p . 53). By this way, in putting together financial statements, accountants must allow for meaningful comparisons. Consistency is the characteristic that makes it possible to track a company’s performance or financial condition from one year to the next.
In other words if the company uses the same accounting methods from period to period we are able to make meaningful comparisons. (Jane L. Reimers, 2011, p . 53) By eliminating many international differences in accounting standards, IFRS eliminate many of the adjustments people have made in order to make companies’ financials more comparable internationally. The adoption of IFRS reduced the cost for investors to process financial information. The gain would be extremely important for institutions that create large financial database. International Accounting Policy Forum, 2006). IFRS raises efficiency and it reduces the cost of processing financial information, which the stock market incorporates it in prices. Most investors can be expected to gain from increased market efficiency(International Accounting Policy Forum, 2006). By reducing international differences the accounting standards assists for removing the barriers to cross- border acquisitions, which in theory will reward investors with increased takeover premiums (International Accounting Policy Forum, 2006).
Disadvantages of IFRS Like everything in life IFRS has disadvantages too. As , I stated above there are several disadvantages that have been presented in public forums, scholarly articles, news accounts, and other places where discussion of public issues are conducted. A discussion of some of the major advantages follows. Despite a belief by some of the inevitability of the global acceptance of IFRS, others believe that U. S. GAAP is the gold standard, and that a certain level of quality will be lost with full acceptance of IFRS. Further, certain U. S. ssuers without significant customers or operations outside the United States may resist IFRS because they may not have a market incentive to prepare IFRS financial statements. (http://www. ifrs. com/updates/aicpa/ifrs_faq. html#q6). A big disadvantage about companies in the US as well as in Macedonia nad the European Union adopting IFRS is that current and future accountants will have to relearn how to do their jobs. Also, IFRS does not permit Last in First Out (LIFO) as an inventory cost method. However, it is to my knowledge that only a small number of companies, about ten percent still use LIFO.
IFRS ideas regarding revenue recognition are more widespread than GAAP containing very little instruction specific to each industry. IFRS uses a single-step method for impairment write-downs compared to the two-step method U. S. GAAP supports. Under the single-step method, write downs are far more likely to take place. Overall, the main and most important difference is the fact that IFRS provides much less specific detail and has fewer requirements in reporting than GAAP does (http://ezinearticles. com/? International-Financial-Reporting-Standards—Adva tages-and-Disadvantages&id=1679687) Manipulation. There is a downside to the flexibility that IFRS allows: companies can utilize only the methods they wish to, allowing the financial statements to show only desired results. This can lead to revenue or profit manipulation, can be used to hide financial problems in the company and can even encourage fraud. For example, changing the method of inventory valuation can bring more income into the current year’s profit and loss statement, making the company appear more profitable than it really is.
While IFRS requires that changes to the application of the rules must be justifiable, it is often possible for companies to “invent” reasons for making the changes. Stricter rules would ensure that all companies are valuing their statements the same way (Accounting and Business Research. International Accounting Policy Forum, pp. 29-30. 2006 ) ; (http://www. cbsnews. com/8301-505125_162-28241310/pros-and-cons-of-ifrs/? tag=bnetdomain) ; (http://www. ifrs. com/ifrs_faqs. html) Cost. A small company would be impacted by a country’s adoption of IFRS in the same way a larger one would.