International Financial Reporting Standards Essay

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International Financial Reporting Standards are accounting  rules and principles  developed and promoted  worldwide  by the  International Accounting Standards Board. Accounting systems reflect the legislative environments in which they have developed. Consequently,  how companies  report  their financial statements   can  differ across  countries.  Faced  with such  differences,  the  national  accountancy   bodies of the  world’s leading  economies  in  1973 founded the  International Accounting  Standards  Committee (IASC) to develop and promote  internationally  recognized financial reporting standards. These standards,  the  IASC believed, would  provide  investors and financial analysts with internationally  comparable and transparent financial information  and enable them to make better economic decisions.

By 2001 the IASC had developed and promoted 41 International Accounting Standards (IAS), providing principles  on  various  accounting  topics  including the presentation of financial statements  (IAS 1), the initial recognition and accounting of property, plant, and equipment  (IAS 16), the disclosure of employee benefits  (IAS 19), and  the  reporting  of intangible assets (IAS 38).

In April 2001 the IASC was replaced by the International Accounting Standards Board (IASB), which amended some IASs and proposed new International Financial Reporting Standards (IFRSs) on topics for which no IAS standards  had previously existed. In 2008, there  were eight IFRSs establishing  rules for the first-time  adoption  of IFRS standards  (IFRS 1), shared-based  payments (IFRS 2), business combinations  (IFRS 3), insurance  contracts  (IFRS 4), noncurrent  assets held for sale (IFRS 5), evaluation  of mineral  resources  (IFRS 6), disclosures of financial instruments (IFRS 7), and operating segments (IFRS 8). That same year, nearly 100 countries  required, permitted  the use of, or had a policy of convergence with IFRSs.

IFRSs have been promoted  by a number  of different  actors.  For  example,  as cross-border   financing has  grown,  multinational enterprises  (MNEs) have increasingly used IFRSs to produce  comparable  and credible financial statements  to access international capital markets. In addition, the increased number of nondomestic firms listed on national stock exchanges has been  accompanied  by an increased  number  of stock markets  that  accept  financial statements  prepared under international standards.  In 2008 capital markets  in  over  50  countries  accepted  companies who reported  their financial statements  using IFRSs.

Companies  based  in  developing  countries   have also driven the application  of international financial reporting  standards.  Eastern  European  companies, for example, have significantly enhanced  their credibility by drawing  up  their  financial  statements   in accordance  with IFRS. The use and stature  of IFRS has also benefited  from  endorsements from  political decision makers. For example, the decision by the European  Union  (EU) requiring  all EU-listed companies to prepare  their  consolidated  accounts  using IFRSs beginning  in 2005 represented a major  milestone for the IASB.

Despite  the  increased  use  of IFRSs around  the world, convergence  between  IFRS and country specific accounting principles remains to be fully achieved. The United  States, for example, does not plan  to  implement  IFRSs until  2011. Studies  have shown that different types of obstacles have impeded the use of IFRSs. Financial costs are one such obstacle because companies consider the transition to IFRSs to be a costly, complex, and burdensome process requiring, for example, investments  to update  IT systems so that  they  can  handle  IFRS financial statements. Another obstacle is patriotism. Some countries, such as France, are attached  to their  accounting  systems and reluctant  to abandon  them  for ones considered to  be inferior.  Former  colonies  of imperial  powers can also be sensitive to external intrusions. This helps explain  why India  and  Pakistan  currently  prohibit companies from using IFRS standards.

Culture presents a further barrier to the use of international  accounting  standards.  For example, French accounting  principles have historically stressed conservatism  and prudence,  as shown, for example, by the  requirement that  companies  report  their  assets at historical  cost. This attachment to  conservatism can help explain why French accounting  companies, banks,  and  insurers   were  concerned   about  problems of earnings volatility and resisted the introduction  under  IFRSs of fair-value accounting  (whereby annual changes in the value of assets are reported  in the income statement).  It remains to be seen whether the IASB can overcome these obstacles and further increase the use of IFRS standards.

Bibliography:   

  1. David Alexander and Christopher Nobes, International Financial  Reporting  Standards:   Context, Analysis and  Comment  (Routledge, 2008);
  2. Keith Alfredson, Applying International Financial Reporting Standards (John Wiley & Sons Australia, 2007);
  3. Nick Antill and Kenneth Lee, Company  Valuation  Under  IFRS: Interpreting and Forecasting Accounts Using International Financial Reporting Standards  (Harriman  House,  2008);
  4. Barry Jay Epstein, and Eva K. Jermakowicz,Wiley IFRS Policies and Procedures (John Wiley & Sons, 2008);
  5. IAS Plus, IFRSs in Your Pocket 2008 (Deloitte Touche Tohmatsu, 2008);
  6. Alan Robb and Susan Newberry Robb, “Globalization: Governmental Accounting and International Financial Reporting Standards,”  Socio-Economic Review  (v.5/4,  2007);
  7. Wiley IFRS 2009 Interpretation and Application of International Accounting and Financial Reporting Standards 2009 (John Wiley & Sons, 2009);
  8. Charlotte Wright,  “Current Developments: International Financial Reporting Standards,” Petroleum Accounting and Financial Management  Journal (v.26/3, 2007).

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