International Financial Reporting Standards (IFRS) are the set principles on how different types of financial transaction should be reflected in financial terms. The set IFRS standard ensures that business and other financial activities are carried out in the fairest way in the global business. It is a basis of financial reporting for the publicly held companies. Its adoption means that there is a fundamental change in the world of accounting.
The IFRS is adopted by the International Accounting Standards Board. This essay assesses and analyzes the value of international Financial Reporting Standards in enhancing international comparability of financial performance and risk of multinational companies.
This paper is organized in different parts that are as follows; the introduction, framework and background, conceptual framework, value and limitations of the international financial reporting standards, financial reports of the given companies, and qualitative characteristics of the conceptual framework and finally the relationship of financial reporting quality with the limitation of international financial reporting standards (Andrews, 2005).
The international financial reporting standards originated from the International Accounting Standards (IAS), which was issued between 1973 and 2001 by International Accounting Standards committee (IASC).
In April 2001, international accounting standards body was replaced by International Accounting Standards Board (IASB) which was charged with the responsibility setting international standards for accounting. During the first meeting, of the board they adopted international accounting standards and Standing Interpretations Committee standards (SIC’s). The board has continued to develop other international accounting standards calling them the IFRS (Nobes & Parker, 2010).
In 1989, the framework for the preparation and presentation of financial statements (The framework) was approved by the IASC Board and published in the same year. In 2001, it was adopted by the IASB, and in 2010, the conceptual framework for financial reporting 2010 (The IFRS Framework) was adopted by IASB. The framework of the IFRS sets out the following on financial reporting; objectives, assumptions underlying financial reports, qualitative characteristics, elements and recognition criteria for the elements identified. The framework is as follows.
- The concepts in the framework are not set out as the requirement for the preparation of general purpose financial reports. It consists the following; (a). Purpose of Statements of Accounting Concepts set out in the policy statement 5 The Nature and Purpose Statements of Accounting Concepts. (b). Non-mandatory statement of accounting concepts under Professional Statement APS 1 compliance with Accounting Standards. (c). Australian Securities and Investment Commission Act 2000.
- The Framework applies to periods on or after January 2005,
- The Framework shall not apply to financial reporting periods before January 2005.
- When applicable the Framework supersedes (a). SAC 3 (Statement of Accounting Concept) Qualitative Characteristics of Financial information as issued in August 1990. (b). SAC 4 (Statement of Accounting Concept) Definition and identification of the basics of Financial Statements as issued on March 1995.
- SAC 3 & SAC 4 will remain operational till superseded by the Framework.
- The term Financial Statement in the title of the Framework means a financial report.
The IFRS is a valuable tool in the global accounting where it is beneficial to the users in different ways, which are as follows; IRFS are acceptable as a financial reporting framework for companies seeking admission in the stock exchanges, in any country of the world. Companies, which have complied, their reports with the set standards of the IFRS are likely to be listed in any of the worlds leading stock exchanges.
It enhances comparability of companies’ financial information which increases quality of information to the stockholders, increases market efficiency, reduces risks; decreases market inefficiency and reduce the cost of capital. This makes the IFRS to be immensely useful to the companies while filing their reports. It eliminates cross border trade in securities, which is because the financial reports are more transparent than using other methods of accounting.
This makes it easy for companies and individuals to invest in foreign countries. It promotes intimate relationship with customers and suppliers across international borders. This is because the financial statements are globally understood and comparable. This relationship helps the business to grow even outside their countries of origin. IFRS being an internationally recognized system makes it easy for accountants to flexibly move from one country to another where their companies have branches.
The IFRS introduces other parameters such as goodwill to be used while doing financial reporting, which were excluded, by other methods of accounting. This increases the scope of accounting which gives more accurate results and shows the true worth of business. It makes it easy for companies to invest in other countries.
This is because they do not have to convert their financial reports in any way because IFRS is used globally (Kumar, 2010). However, the IFRS has limitations and disadvantages which make it hard for it to have smooth operation. One of the limitations is that in the short run, it will increase the cost of operation. This is because the accountants will need time and money to learn has to use the new system.
There is some inefficiency in changing the older documents to IFRS system. This is because the system introduces goodwill while computing which was not used in other methods of accounting (Weyngandt et al., 2010). The goodwill is valued at historic cost, and they are not revalued to give their true worth presently; therefore, it results to wrong value of companies’ assets.
The method introduces intangible goods as a component to be used in the computation. This results to impairment charges in valuation of the intangible assets which is highly sensitive. This is because the carrying value of the intangible assets may be higher than their actual value (Latridis, 2008).
Another limitation is that it uses a lot of accounting jargons, which will make, it hard for the non accountants to understand. This means one must have knowledge in the IFRS interpretations.
This may limit the use of IFRS or lead to inefficiency. The IFRS reports are highly summarized which means that the information provided is limited and hard to understand if not a specialist in accounting. Another limitation is that it is hard to calculate the true value of some things such as the intellectual value which is included in the IFRS computations; therefore, resulting to wrong valuations (Tsakumis et al., 2009).
The two multinational companies, that is Barclays bank and Bank of America assist IFRS in doing their financial reporting. They adhere to all the standards set by the IFRS system. There are criteria which are used to evaluate on the quality of the financial reporting they are as follows.
Assets, which are documented, in the balance sheet with the probability of future economic benefits will flow into the company. The assets have costs and value which are measured reliably. The companies use the IFRS to analyze their assets in relation to their costs and value. This increases quality of their financial reports because all their assets are valued and used in final computation of profits. Assets list whatever a company owns plus what others owe the company (Tarca, 2004).
Liability is another criterion used to measure the quality of financial reporting of the two companies. Liability is documented in the balance sheet. There is a probability that the outflows resources of economic benefits will result due settling of present economic obligations.
The amount at which payment will take place can be considered in reliable terms. Liabilities are the present obligation of a company resulting from past events and include capital, creditors among others. Liability lists the entire obligation which a company expects to settle this helps in giving accurate financial reporting. With the use of IFRS, the companies analyze their liabilities against their assets result to balance sheet thus making the financial reporting of quality (Ghosh, 2010).
Another measure of quality is income. Income is used in the income statement where increase in assets and decrease in liability lead to an increase in future economic benefits, which can be measured in reliable terms.
For example, an increase in assets resulting from loan payments from customers or decrease of liabilities resulting from waiver of debts payable will need to accurate calculations of the companies worth. Therefore, with the proper use of the IFRS the companies realize their profits and losses. Recognition of income is simultaneous with recognition of increase in assets or a decrease in liabilities (Saini, 2005).
The last criterion is expenses this is recognized when there is the increase in liability and a decrease in assets, which can be measured reliably. This results into a decrease in the future economic benefits. Recognition of expenses is simultaneous with recognition of increase in liabilities or decrease, in assets (Goodwin & Ahmed, 2006).
There are qualitative characteristics of financial reports. One such characteristic is understandability which means that the financial reports should be understood by those who are using them, for example, the share holder. Understandability of financial reports enhances faster decision making in a company because the shareholders do not need a lot of clarifications.
Another characteristic is reliability a financial report should have the correct information to be reliable for use so as to make the right decision. Financial reports should be relied on by the decision makers as the only source of their information. Relevance is another quality where it should be related to whatever a company is doing and has the right information and communication.
Financial reports should have the relevant information to help the shareholders in decision making. Lastly, comparability the financial reports of different companies of the same industries should be comparable to help them make decisions on where to invest (Hung & subramanyan, 2007).
The quality of financial reporting is crucial, but it is interfered with by the limitation of the IFRS. For example, it is limited by the quality of information to be included in the financial reports this include parameters such as goodwill and intangible goods which are hard to quantify in monetary terms.
The quality of Barclays and bank of America is compromised by the limitation, such as the true value of intellectual capacity, which is hard, to determine is not included in the financial reporting and yet it is a company’s resources.
However, limitations such as increased cost and use of accounting jargons are eliminated with time as accountants get to understand the IFRS better for quality financial reporting. Increase in operating costs hinders the companies to have effective plans, which lead to, inefficiency in their service provision. The costs that are incurred in implementation of the IFRS were not planned for, but come as a necessity to the companies (Hung, 2001).
In conclusion, IFRS is a vital system in the modern world of accounting where financial reports are done in a uniform manner, in different countries. Limitations which would hinder a company from investing in foreign countries are eliminated by the IFRS, which is the recommended system in the world.
The IFRS is a reliable measure of quality for a company. It introduces other parameters such as goodwill and intangible goods which were not included in other accounting systems. IFRS is a quality system which covers a wide scope of information and gives summarized reports which are easier to understand than other accounting systems.
However, IFRS has limitations which hinder its proper operation, but when eliminated it will remain the best accounting system of financial resources. IFRS should be adopted by all countries and companies for their financial reporting. Information, which is vital, but could not be included in the essay, is summarized in the appendix at the end of the essay.
References
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Kumar V.P, 2010. First lessons in IFRS. Punduchery India: Snow White.
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