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International Financial Reporting Standards: Pros and Cons Essay

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Updated: Sep 15th, 2020


Accounting standards such as GAAP and IFRS have different effects on the quality of financial reporting. However, the two frameworks are founded on the awareness that bookkeeping is instrumental in business decision-making processes. Creditors and shareholders deploy information derived from these tools in making crucial decisions regarding capital commitments upon evaluating potential investment opportunities based on the anticipated returns. Many nations have embraced International Financial Reporting Standards (IFRS). This tool bears regulations that define a variety of globally permissible accounting practices. The International Accounting Standards Board is mandated with developing and promoting the adoption of IFRS rules. Indeed, some nations have insisted on the need for mandatory adoption of IFRS principles in accounting reporting. However, this call does not imply that such standards lack disadvantages. A critical discussion of issues raised in the study by Ball (2006) confirms that indeed IFRS guidelines have their strong and weak points.

Issues Raised in the Article

The Issue of Quality Accounting

Ball (2006) argues that IFRS has an inherent advantage in the way it views the subject of quality in accounting. Conventional setters of accounting standards assessed quality in terms of the reliability and relevance of information generated for reporting. Nevertheless, the author criticizes this notion by noting that such concepts are no longer constructive in the contemporary accounting world. According to Athma and Bhavani (2018), IASB seems to agree with Ball’s (2006) sentiments because the agency does not emphasize the issue of reliability. The article under investigation identifies two situations in which reliability in accounting standards may be a contentious issue. For any one transaction, reliability may imply the extent to which numbers reported are void of estimation faults. The second type implies the degree to which the provided financial information is free of misrepresentation by way of administrative manipulation. Although Ball (2006) suggests that IFRS ignores reliability, the author is quick to reveal the way the agency focuses on ensuring that earnings are more informative and that they provide valuable information through balance sheets. According to Ball (2006), IFRS guarantees the reflection of true and quality economic gains, as opposed to a mere representation of legal forms.

From one perspective, compulsory adoption of IFRS produces positive effects on quality accounting when compared to GAAP. However, the article does not capture the condition under which this claim may be valid. Bhattacharya, Desai, and Venkataraman (2013) clarify that IFRS may be fruitful if it reduces the probability of witnessing income overstatement cases, fails to permit smoothing, and/or lowers the level of discretion among management bodies. The converse of these conditions implies that mandatory adoption of IFRS has negative effects on accounting. Characteristics of accounting elements such as aggressiveness in reporting or smoothing depend on various factors that operate in a synchronized manner. They include the business operational framework, the economic atmosphere, administrative accounting reporting choices, and management enticements (Bhattacharya, Desai & Venkataraman 2013). Consequently, changing only one aspect, namely, the accounting standard, does not necessarily translate into improved reporting quality. Consequently, it is crucial to realize that accounting quality requires a multivariable approach. However, Ball (2006) raises pertinent quality issues that demonstrate the significance of adopting IFRS in the global context.

Transparency in the Application of IFRS Guidelines

The primary objective of the IASB entails developing internationally comprehensible, high quality, and enforceable accounting principles. In achieving this goal, the accounting regulatory body needs to ensure that IFRS upholds transparency and/or provides a mechanism for accounting comparisons to help in generating and sharing information that positively influences business decision-making (Kılıç & Uyar 2017; Rankin et al. 2018). However, developing standards makes no sense without a system of promoting their rigorous and transparent application is not in place. This situation requires the IASB to establish principles that resemble the existing standards in different nations. Upon accomplishing this objective, merits of IFRS can be realized when countries adopt them. In particular, firms that engage in international businesses where uniformity and transparency are vital in reporting benefit from IFRS, especially when in need of actual business performance records in different nations.

In the context of Ball’s (2006) arguments, less emphasis on reliability cannot be negated if accounting measures guarantee proper reporting to the extent that stakeholders can make informed investment decisions. Indeed, mandatory IFRS adoption may increase or reduce quality and transparent accounting. The capacity of IFRS to eliminate particular alternatives implies that managerial discretion remains on the check. Hence, Ball’s (2006) issue of quality is well substantiated because this move lowers the probability of earnings manipulations. IFRS encompasses a principle-based approach to accounting. Gordon and Hsu (2018) agree with Ball (2006) regarding the issue of quality and transparency. According to the authors, when applied in strict conformity with standards setters’ regulations, IFRS minimizes the potential of evading proper reporting (Gordon & Hsu 2018; Godfrey et al. 2010). The principle-based approach to IFRS standards means that they are devoid of detailed guidance regarding their implementation. As a result, a manager may deploy unattractive alternatives that can lower accounting quality.

The debate on how and/or whether IFRS promotes quality accounting, despite its minimal focus on reliability, remains unsettled. Ball (2006) validly and satisfactorily demonstrates the merits of such standards to investors. Concurring with the opinion by Ball (2006), Athma and Bhavani (2018) assert that IFRS has been adopted by over 100 nations, implying that the availability of a common standard helps in ensuring the convergence of different national accounting principles. Thus, IFRS promises accurate, transparent, consistent, timely, and comprehensive availability of informative financial statements (Ball 2006; Athma & Bhavani 2018). Compared to national accounting guidelines that are only valid in specific jurisdictions, IFRS replaces public reporting in all nations that have adopted them. Arguably, limited emphasis on reliability, especially the extent to which financial information reported through IFRS remains free of misrepresentations, compromises the dependability of IFRS because it paves the way for the failure of businesses to make informed decisions. However, Ball’s (2006) article refutes this position. According to the author, IFRS provides a way of making effective valuations of equity markets in the absence of information asymmetry (Ball 2006). In addition, such financial assessments may be transparent and quality where the management team observes corporate governance principles, which help in lowering investors’ risks (Rankin et al. 2018). This merit of IFRS is central, especially where investors want to compare their findings with those of other jurisdictions to determine where they can get better investment values as measured from the ROI.

The Issue of Information Asymmetry

IFRS promotes quality accounting information due to its standardized nature. As Ball (2006) reveals, small investors are more likely to depend on information presented to them in the form of financial statements compared to significant shareholders who have higher access to insider information. This argument is compelling because improved quality in financial reporting through IFRS eliminates any possibility of information asymmetry. As a result, upcoming investors can equally compete while minimizing trading risks, thanks to better and highly informed professionals. Indeed, as Bhattacharya, Desai, and Venkataraman (2013) posit, agency problems occurring between firms’ administrators, entrepreneurs, and shareholders reveal the root of information asymmetries. Managers have more information regarding the anticipated organizational performance.

Failure to share such information may disadvantage some potential investors. This issue informs Ball’s (2006) emphasis on the need for reducing existing differences in international accounting standards. Further, this strategy eliminates barriers across borders, especially in acquisitions coupled with divestitures, which theoretically lead to the awarding of investors who have higher takeover premiums. Ball (2006) reveals the way IFRS guarantees low information costs and risks. However, the article does not acknowledge the fact that this argument does not hold in all situations. According to Ahmed, Neel, and Wang (2013), low information expenses can only be realized if IFRS principles are implemented consistently. In fact, fair value accounting guidelines lead to the incorporation of more financial information in statements as a way of ensuring that businesspeople make well-calculated investment decisions.

Uneven Implementation of IFRS

Amid the wide acceptance of mandatory adoption of IFRS in many nations, Ball (2006) asserts that such standards have several drawbacks, which range from uneven implementation, politics, and polarization to innovation and competition of financial reporting systems. Economic and political differences across jurisdictions lead to the uneven execution of IFRS guidelines (Ball 2006). This argument is founded on the awareness that differences in international accounting reporting are inevitable. Although IFRS offers standardized approaches that eliminate such differences, its adoption remains a political debate. Substantiating his point, Ball (2006) observes that amid the growing wave of globalization, which creates the need for a homogeneous bookkeeping approach such as IFRS, economic and political influences to accounting practices mainly remain localized.

According to Ball (2006), the “toothless” nature of the IASB implies that it does not have any enforcement ability to force nations to adopt IFRS standards without reluctance in favor of localized and politicized reporting systems. For example, standards, including IAS 36 and IAS 38, require organizations to conduct a long-term review of both indefinable and physical assets with the objective of determining potential hindrances to the rule of fair value. The article raises an important issue concerning whether managers and auditors using IFRS can “comb through firms’ asset portfolios to discover economically impaired assets with some degree of diligence and ruthlessness in all countries” (Ball 2006, p.17). This matter presents a strong case in support of the cons of IFRS. Thorough audits on firm’s assets to guarantee compliance to IFRS only add costs to an organization. Therefore, unless organizations are interested in asset auditing with some beneficial gains, chances are that they may inspect them in a reluctant manner when required to do so by virtue of the need to conform to any accounting standard.

The Risk of IASB Politicization and Polarization

The threat of IASB politicization and schism presents a major issue that compromises the goals of IFRS. Considering that the agency, which sets such accounting rules, maintains a common law course (Ball 2006), chances are that some countries may prefer their national standards to IFRS. One may agree with this point because some nations evidently retain their accounting standards even with the popularization of IFRS. For example, America has maintained its GAAP guidelines that which it regards as a principle-based accounting system. It does not set particular rules to be followed when preparing financial accounts as evidenced in the case of rule-based accounting frameworks. Instead, it only provides a conceptual accounting structure. However, indications are that the U.S. is shifting towards a more international standard such as IFRS.

Ball (2006) offers a practical solution to the above issue. He believes that IFRS can help to overcome problems experienced by nations’ accounting standards when organizations seek to “go global” by providing a harmonious mechanism for comparing bookkeeping reports. However, Ball (2006) observes that IFRS hinders innovation and competition in financial reporting systems. The article regards innovation as necessary since it encourages adaptation while at the same time penalizing bureaucracy. This argument against IFRS acknowledges the fact that competition in the international arena of different economic systems is healthy. Hence, attempts to centralize IFRS entail a risky endeavor to competition among different economic systems. While mandatory adoption of IFRS is detrimental to the continued existence of national standard-setting agencies, a means of bridging the prevailing is important, especially upon considering that more firms are now engaging in international business.


After setting the appropriate amount of financial resources to allocate to particular organizations, accounting information becomes the tool that investors use in monitoring the manner in which such companies expend the capital given to them. Consequently, it is imperative for businesses to deploy accounting standards that guarantee information revelation to all those who need it. IFRS eliminates differences between various national accounting standards. This move is beneficial to organizations that have global businesses because it enhances high quality and transparent reporting. Nevertheless, the standard-setter body, IASB, lacks an enforcement mechanism. Since politics and economic systems available in different nations operate in the local context, the execution of IFRS suffers uneven implementation among different nations.

Reference List

Ahmed, A, Neel, N & Wang, D 2013, ‘Does mandatory adoption of IFRS improve accounting quality? Preliminary evidence’, Contemporary Accounting Research, vol. 30, no. 4, pp. 1344-1372.

Athma, P & Bhavani, O 2018, ‘IFRS in India financial implication in select companies’, IUP Journal of Accounting Research & Audit Practices, vol. 17, no. 1, pp. 7-22.

Ball, R 2006, ‘International financial reporting standards (IFRS); pros and cons for investors’, Accounting and Business Research, International Accounting Policy Forum, vol. 30, no. 1, pp. 5-27.

Bhattacharya, N, Desai, H & Venkataraman, K 2013, ‘Does earnings quality affect information asymmetry? Evidence from trading costs’ Contemporary Accounting Research vol. 30, no. 2, pp. 482-516.

Godfrey, J, Hodgson, A, Tarca, A, Hamilton, J & Holmes, S 2010, Accounting theory, 7th edn, John Wiley & Sons, Hoboken, NJ.

Gordon, E & Hsu, H 2018, ‘Tangible long-lived asset impairments and future operating cash flows under US GAAP and IFRS’, Accounting Review, vol. 93, no. 1, pp. 187-211.

Kılıç, M & Uyar, A 2017, ‘Adoption process of IFRS for SMEs in Turkey: insights from academics and accountants’, Accounting & Management Information Systems, vol. 16, no. 2, pp. 313-339.

Rankin, M, Ferlauto, K, McGowan, S & Stanton, P 2018, Contemporary issues in accounting, 2nd edn, John Wiley & Sons, Hoboken, NJ.

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