IFRS (International Financial Reporting Standards) is a set of commands and instructions, developed by IASB (International Accounting Standards Board), to govern and offer guidelines to the accounting profession. Though different countries have their own set of accounting rules and standards, an increasing number are adopting International Financial Reporting Standards in their reporting. This paper looks into the demerits and merits of the adoption of International Financial Reporting Standards by a country.
Advantages of adopting IFRS
The world has become a global village where the movement of labor, capital, and resources has been facilitated by good transport and communication infrastructure; for a country to benefit from the changes and enable their local companies to be competitive, there is a need to have high-quality global accounting standards. Since IFRS is generally accepted by over 100 countries and used by 12000 companies, then adopting it will be of benefit to the adopting country. For an international investor to gauge a certain company, he requires to have a common set accounting policy for easier analysis.
The system of accounting will facilitate comparability of financial accounts wince a uniform set of accounting policies will have been used to make the accounts. When this is facilitated, a company will be able to compare its national efficiency in different industries when compared with other countries.
Accountants and auditors, are hired by a company but are supposed to be objective and not favor their employer at the expense of financial accounts users, International Financial Reporting Standards have checks and balances that ensure ethics is maintained in the professions. This will facilitate accounts usability and be of more benefit to investors, shareholders, governments, and management.
The system facilitates transparency in the accounting profession thus allowing easier cross-border investment; when the same set of accounting policies are used, then transparency and full disclosure will be facilitated. The system will eliminate chances of having parallel sets of accounts for the same company; when using domestic standards, this scenario is common calling for preparation of another set of accounts (Atrill and Jenner, 2009).
Challenge of adopting IFRS
Before a country has set into the system fully, it calls for massive capital investments to train and change their traditional accounting systems. The training will not only be to up-coming accountants and auditors but also to already existing companies who have the old policies at hand. This may lead to repellence and resistance to change in the economy.
To maintain the standards, mostly a county needs to develop an institution to assist and monitor the use of the standards; this calls for extra investments in the country. The existence of a monitoring body will affect the objectivity of accountants since they will be performing their duties not for the traditional user of accounts but also for the controlling body. At the end of the day, there will be multiple people to report to; this hampers professionalism.
The standards though not static may not adjust as fast as individual countries may require; they have to make consultations which take years; the slow rate of adjustments results in delayed benefits to accountants and users of financial statements. At the same time, the system is not responsive to individual countries needs and culture (Bill and McKeith, 2009).
Adopting International Financial Reporting Standards has merits and demerits; merits include comparability, facilitation of trade, and transparency whereas demerits include investment costs and insensitivity to individual countries’ needs.
Atrill, M. H. and Jenner., 2009. An Introduction: Accounting 4. Boston: Pearson Education Inc.
Bill, C.and McKeith, J., 2009. Financial Accounting & Reporting. New York: McGraw-Hill.