International Accounting Standards
The International Accounting Standards Board (IASB), is an independent international entity which sets/ proposes accounting standards. This entity originally came to being in 1973, as the International Accounting Standards Committee (IASC), and later came to be known as IASB. This agency is responsible for setting the International Accounting Standards (IAS) meant to govern accounting across nations.
However, in 2001, the IASB replaced the IAS with the International Financial Reporting Standards (IFRS). The intention of developing these and its predecessor, accounting standards was to bring a sense of uniformity in accounting, globally. These standards are meant to help investors, authorities and other market participants to have transparent and reliable information. This further helps in promoting sound, economic decisions on part of all the entities involved in the international markets.
Benefits of Implementing International Accounting Standards
The main aim for implanting a particular set of International accounting standards is to bridge the gap between the different accounting standards amongst various countries. Various researches show the implementation of the IFRS to improve the overall quality of accounting information. Listed here are some broad benefits of setting and implementing international standards:
The international financial and corporate markets calls for corporations from different markets to work in synchrony with one another. However, different countries follow different accounting procedures and guidelines which hindrance smooth operations. Comparing data from companies belonging to different markets is also tough since they follow different methodologies.
It is thus important for businesses to use similar standards when collecting financial data and preparing statements. This also enhances transparency in reporting and leads to more accurate comparisons between their financial standing. Comparability is definitely beneficial for investors and other market participants when making economic and financial decisions.
Additionally, enhanced comparability of financial information is also beneficial to the regulatory authorities around the world.
Promotes accountability for all involved parties:
When the parties involved in international operations/ transaction belong to different countries/ market, information gaps can arise very easily. The IFRS standards in this case reduce the information gap, and strengthen the accountability between the providers of capital, and entities who are entrusted with the funds.
They make it possible to avoid falling into the pits of misinformation, and make sound decisions based on credible information.
Induces flexibility in accounting:
Statements and reports prepared using different methodologies are difficult to read and compile when trying to bring inter-national companies together. Other tasks at hand when dealing with international markets, also become more complex.
Here, IFRS give businesses across globe the freedom to adopt uniform accounting standards. Following a fixed set of standards induces uniformity in gathering of financial data. This results in businesses being able to prepare financial statements that are more flexible, easy to read, and compile together.
Lowers the cost of raising capital in the international market:
Raising capital in the international market can be a pain when all entities use varied principles to compiling financial information. It is also a cause of unease to investors when it is difficult to compare information and make sense of financial data. Additionally, compiling data collected and presented using different methodologies can be a costly affair.
Essential is will be easier and more cost effective to raise capital if companies can create confidence in the minds of international investors that their statements comply with global standards. The IFRS standards are hence functional in bringing down the cost of raising capital in international markets.
Complying with the IFRS across countries and industries can help investors identify opportunities and risks in various market with ease. These standards hence induce economic efficiency in identifying opportunities and other decision making processes. They also help in better allocation of capital when business follow a single, trusted accounting language.
Lower the cost of international accounting
Reporting and regulatory costs under international accounting (subset of accounting) have been high in absence of uniform standards. This is especially true for companies that have subsidiaries in multiple countries and partake in many international operations.
Use of IFRS can hence reduce the cost of reporting in the international market. As well as the cost of regulating financial activities taking place internationally.
This shows how important it is for all major inter-national players to follow the IFRS. However, the bid to make IFRS omnipresent has not been 100% successful.
Challenges in Implementation of IFRS
Over time, we have seen significant progress in the development, implementation and adoption of a single set of accounting standards. The European Union has adopted the IFRS as its standard for accounting and financial reporting. However, the United States, China and Japan are yet to implement a complete IFRS mandate in their operations.
While China says it is working towards an IFRS mandate, Japan allows for voluntary adoption of IRFS. The United States, however has taken a different route, even though they claim to have been working towards adopting the IFRS since 2002. The Financial Accounting Standards Board (FASB) and the IASB are working on converging the U.S. Generally Accepted Accounting Principles (GAAP) and the IFRS.
This brings to light the fact that there are many challenges in implementing the IFRS worldwide. But what are they? Have a look at a few of the obstacles listed below:
- There is a lack of proper training and of consultancy services in regard to IFRS. This is probably because IFRS is still comparatively new and not universally implemented.
- The lack of appropriate and relevant specific knowledge and practical experience.
- Many difficulties arise in the use of the fair value concept.
- Another incomplete challenge implementation of IFRS is the transition costs involved. Many entities are discouraged due to the existence of such charges.
- Continuous amendments in the IFRS and a lack of timely interpretations of the same also deter implementation of the standards.
- Limited knowledge possessed by the financial statement preparers, users, regulators and auditors.
This summarises some of the most prominent challenges faced in implementing the IFRS worldwide.
Despite all the challenges and doubts, it is clear that the global adaption of IFRS is essential. It is the only way to bring uniformity in the international market and promote sound economic decisions. Entities in different countries should make a conscious effort to promote IFRS mandate