Financial Reporting Theory Essay:
Through financial reporting, it is possible for external users and other stakeholders to access financial statements of organizations thus enabling them to assess the returns and risks associated with investments. International Financial Reporting Standards (IFRS) form an integral part for the reporting of financial information across the world. The basis for the double entry rule in accounting is the accounting equation, assets = Claims. The conceptual regulatory environment framework of financial reporting is the main area of concern in this discussion. There is a detailed discussion of the regulatory framework needed in financial reporting. The IFRS have been in use for some time now since they came in place in 2005. The use of IFRS has been associated with numerous advantages and disadvantages. The countries that have fully adopted the IFRS have had a number of challenges and benefits. Nevertheless, the ultimate adoption of IFRS in countries such as the UK has been associated with more benefits that override the challenges of implementation. This discussion will entail a history of the IFRS and current developments that have been included in it. It will also discuss the advantages and disadvantages of IFRS. A case study of the use of IFRS in UK will be discussed to highlight on the impacts these standards have had in the country.
History of the IFRS and current developments
In the year 1973, the International Accounting Standards Committee (IASC) was established with a mandate to develop accounting standards to be used by smaller nations in creation of own accounting reporting standards. The committee was succeeded by the International Accounting Standards Board (IASB) later in the year 2001. IASB had its headquarters in London. It is charged with the mandate to develop accounting reporting standards for private companies and not for profit organizations. The selection of the 15 members of the IASB is based on technical competence and background from different nations. Fundraising activities are the main source of funding for IASB. IASB had a primary role of promulgating IFRS. The development of IFRS has been a journey that has involved numerous committees and boards all exerting concerted effort towards the realization of the IFRS. Before, the adoption of IFRS, the IASB were in use for a long time (Amanda & Burks, 2012).
The past decade has been characterized with intensified debate from academics pertaining to the IASB and the subsequent production of IFRS. Within a decade, the IASB has been able to transform the international reporting standards with the adoption of IFRS. Nevertheless, the International Accounting Standards Committee (IASC) set the foundation for the effective performance of IASB during the 27 years of its tenure. The evolution of IASC and IASB are based on tales of international reporting standards for the private sector. Initially, these standards were only recognized within the private sector (Zeff, 2012). They later expanded to be recognized and supported by national standard setters and eventually the regulators of capital markets and ministries of the government. Indeed, the IASC and IASB came to be recognized worldwide by the preparers of financial statements. In particular, the IASB benefited from the good timing as it was the only existing competent standard for accounting reporting when the European Union was looking to establish uniform financial reporting standards for listed companies within EU.
The process of setting international standards started several decades ago to facilitate industrialized countries to adopt standards that could also be used by the developing nations. Nevertheless, the business world has continued to exhibit global characteristics prompting regulators, large companies, auditing firms and investors to recognize the importance of adopting similar reporting standards in financial reporting. A survey undertaken in 2007 by the International Federation of Accountants (IFAC) revealed that most accounting leaders globally supported the adoption of common accounting reporting standards. Indeed, 90% of 143 accounting leaders from 93 countries regarded common accounting standards as important for economic growth. There are more than 120 countries currently with jurisdiction on the use of IFRS. For instance, the EU requires all companies to apply IFRS in their accounting reporting. Indeed, the world has warmed up for IFRS. Japan, New Zealand, Israel, Brazil and Australia adopted the use of IFRS in 2010. Similarly, Canada adopted IFRS in 2011 and Mexico in 2012. At the same time, Hong Kong adopted the IFRS in 2012 while China re-aligned national standards with IFRS in 2012.
The IFRSs have received massive support globally from various countries and accounting leaders. For instance, the IFRSA have been supported by various U.S. corporate bodies, as well as financial and economic leaders from diverse sectors of the global economy. Recently, the Group of 20 (G20) leaders urged the IASB and U.S. Financial Accounting Standards Board (FASB) to fast truck the convergence of the two standards. As a matter of fact, the Securities and Exchange Commission (SEC) has been detrimental in offering the required leadership towards the realization of internationally recognized financial reporting standards. Consequently, SEC has increasingly demonstrated its desire to have in place internationally accepted financial reporting standards to reduce costs for companies listed in several stock exchanges. The year 2008 saw an agreement between FASB and IASB to develop high quality and global standard financial reporting standards. The agreement would see an alignment of Generally Accepted Accounting Principles (GAAP) with IFRS. Currently, the IFRS have become increasingly acceptable worldwide. The use of IFRS is affecting numerous aspects of company operations especially those that have been using other standards. The application of IFRS has also greatly affected the CPA profession as there is need for increased education and training.
Advantages of Converting to IFRS
The political and economic forces shape the accounting profession. Therefore, increased global integration of politics and markets leads to increased financial integration and especially on the reporting standards of financial statements. The international financial reporting standards have been issued by the IASB which is an independent body based in London in UK. The IFRS are rues that are aimed at governing the financial reporting of public corporations worldwide. The IASC was charged with the mandate of issuing international financial reporting standards between 1973 and 2000. The trend towards the adoption of IFRS has been associated with numerous advantages (Yoon, 2009). The recent increase in cross-border integration of different markets has prompted the need for a convergence of financial reporting standards. There are numerous advantages associated with the convergence of international accounting reporting standards. To start with, there have been massive praises heaped on common financial reporting standards especially on the cost savings aspect. Indeed, the international transaction and communication has become increasingly fast leading to widespread impacts on virtually all sectors of the global economy.
The use of IFRSs has particularly been associated with increased global integration of the financial market. Indeed, today’s financial market is a global affair as opposed to just a decade ago. People in different parts of the world can easily access financial information of various corporations and make decisions about such corporations. In particular, the use of IFRSs across many nations and economies has enabled participants in the financial markets to analyze various investment opportunities provided by the corporate entities. The application of IFRS has also led to the increased integration of the practices of financial reporting globally. With several nations having adopted the use of IFRS as the standards for accounting and financial reporting, there has been a trend towards the adoption of similar reporting standards worldwide. This has made it easy for different financial markets from various parts of the world to be integrated through the reporting standards.
The use of IFRS worldwide has also been associated with increased accuracy level, timing, and comparability of information contained in financial reports. Indeed, the adoption of IFRS has led to increased accuracy, comprehensiveness, as well as timeliness of the financial statements in comparison to the national standards initially used. The outcome has been informative valuation by the stakeholders and consumers of financial statements information. Therefore, the use of IFRS decreased the level of reliance on other sources of financial information especially by small scale investors. IFRSs have also meant that the initial variations in financial reporting are no longer an issue of concern for the market participants across the globe. The adoption of IFRS across the global finance and accounting environment has led to ease in the flow of accounting information worldwide. For instance, while the IAS 18 which deals with revenue recognition like sale of goods, services and use of entity assets by other on interest basis, royalties or dividends, the IFRS framework on revenue recognition has led to additional criteria for recognition. Additionally, the practice of IFRS on substance over form is to recognize the commercial substance as opposed to legal form.
Disadvantages of Converting to IFRS
The differences between U.S GAAP and IFRS have diverse impacts on various aspects of business operations. There is doubt that IASB will continuously uphold quality standards as well as public enforcement of financial reporting. The IASB has enjoyed a monopoly status in Europe which may eventually means that when the U.S agrees to conform to the IFRS, it may mean that it also complies internationally. This would mean that IASB would acquire monopoly status. Currently, there is a general lack of skills and government enforcement towards the adoption of IFRS especially in the developing nations. At the same time, there are many countries that are using IFRSs as a brand; this has the effect of bringing about confusion as many countries would prefer being unique. Similarly, the application of IFRS in many nations is a major hindrance for innovations in accounting at the domestic level. This has greatly reduced competitions among different national accounting reporting standards.
Initially, a look into the adoption of IFRS worldwide seems advantageous to all people. However, a closer look into the matter reveals a lack of such highly praised benefits. Indeed, the IFRS does not to fully fulfill the goal of having a globally recognized standard. There are massive transition costs incurred by organizations to adopt the IFRS. Many stakeholders are skeptical about the possibility of the benefits overcoming the transition costs (Yoon, 2009). There is no doubt that multinational corporations will enjoy reduced costs, however, firms operating at very local level are facing immense challenges. There are doubts as to whether there will be maintenance of quality with the shift to IFRS. The IASB does not have a distinct source of financing apart from the fundraising from corporate entities. Therefore, there are doubts as to whether the board can uphold high level of credibility in the long term. The disadvantages for use of IFRS worldwide have to some extent slowed down the adoption of these standards by all nations globally. Save for the various advantages associated with IFRS application by multinational corporations, doubts still linger as to whether IFRS can successfully serve the needs of the global accounting profession. IFRSs have more discretion in comparison to U.S. GAAP whereby principles have to apply at all times. For instance, value judgment of the accountant is incorporated into the financial report. In particular, the use of fair values in IFRS is not consistent with the U.S. institutional law.
A Case Study for the use of IFRS in UK
The financial reporting Council (FRC) is a body empowered by the UK law to set account ting standards in the country. The standards set by FRC are also applied in the Republic of Ireland. The FRC works closely with the European Financial Reporting Advisory Group (EFRAG) in order to promote the sustenance of high quality during financial reporting and disclosures. Furthermore, FRC and EFRAG are highly committed to the full implementation of IFRSs throughout Europe. The FRC has put concerted effort towards influencing the international financial and accounting community to intensify debate on standards in an effort to ensure high quality reporting standards globally. Currently, the United Kingdom has fully adopted the international financial reporting standards in the consolidation of financial statements. All corporate entities with regularly trading securities are expected to apply IFRS in their financial reports. The European Union committed in 2002 that it would adopt IFRS as from January 2005.
As a member of the EU, the United Kingdom was bound to adopt IFRS as per the agreement made among member states. In the UK, all the diverse corporate entities with publicly traded securities were to report their consolidated financial reports through IFRS. Therefore, the London Stock Exchange Main Market was also included. There are various regulated markets in the United Kingdom and which are subject to the IFRSs. They include: BATS Europe Regulated market,, Intercontinental Exchange, ISDX Main Board, N YSE Euronext London, The London International Financial Futures and Options Exchanges, The London Metal Exchange, and the London Stock Exchange. In the UK, the option of IAS Regulation permitting application of IFRS as an option based on EU companies with securities not trading in the regulate market has been used. The application of IFRS in the UK has had numerous advantages such as increased integration within the EU and worldwide, enhanced accuracy, elimination of diverse variations and increased information flow across the EU and globally. Some disadvantages include huge implementation costs, use of IFRS as a brand across EU and globally, discouraging innovations within UK accounting bodies and reductions in competitions among various national accounting bodies within EU and globally.
There has been a regulation of the accounting equation with the intention of enabling the users of accounting information to read, understand, compare and make decisions from the financial statements presented by corporations. The use of IFRS has been associated with numerous advantages and disadvantages. The use of IFRS worldwide has also been associated with increased accuracy level, timing, and comparability of information contained in financial reports. The process of setting international standards started several decades ago to facilitate industrialized countries to adopt standards that could also be used by the developing nations. The IFRSs have received massive support globally from various countries and accounting leaders. As a member of the EU, the United Kingdom was bound to adopt IFRS as per the agreement made among member states.
Amanda, P & Burks, E 2012. Preparing for International Financial Reporting Standards. Journal of Finance and Accountancy.
Yoon, N 2009. Advantages and Disadvantages of Switching from U.S. GAAP to IFRS. Charles Center.
Zeff, S 2012. The Evolution of the IASC into the IASB and the Challenges it faces. The Accounting Review, vol. 87, No.3, pp. 807-837.