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International Financial Reporting Standards (Benefits of having one set of…
International Financial Reporting Standards
The International Accounting Standards Board
IFRS Standards are issued by the IASB. The IASB is a private sector body whose aim is to produce high quality accounting standards for use on a global basis, in the public interest.
The standards comprise
International Financial Reporting Standards (IFRS);
International Accounting Standards (IAS) issued by the IASB’s predecessor, the International Accounting Standards Committee (IASC)
Accounting Interpretations.
FRS Standards are developed through agenda consultations to determine which areas of accounting need improvement. The IASB will then issue Discussion Papers and Exposure Drafts on a particular issue for consultation on an international basis, which leads to a final IFRS standard being published
For major subjects, the development of a final standard can take many years. The standard will usually have an implementation date some time away, to give companies affected time to prepare for its implementation.
FRS offers a single set of globally accepted accounting standards which has now been adopted by around 130 countries around the world to replace or augment their local Generally Accepted Accounting Practice or Principles (GAAP), with the notable exception of the US. In addition, Japan and India are moving only slowly towards IFRS Standards adoption. Until these important global economies adopt IFRS Standards, there will be reporting variations and disparity arising between those entities reporting under IFRS Standards and those reporting under their national standards.
The US and IFRS Standards
The US is still to make any formal recommendations on the adoption of IFRS Standards in place of US GAAP. The standard setter in the US is the Financial Accounting Standards Board (FASB), which sets accounting standards by permission of the US Securities and Exchange Commission (SEC).
The FASB and IASB have worked jointly towards convergence of accounting standards for some years, with the stated goal of achieving a single set of high quality global accounting standards
The US SEC was expected to make a decision on the adoption of IFRS Standards by the end of 2012 but it now appears unlikely that there will be a wholesale move
to adopt IFRS Standards in the US in the foreseeable future
At least part of the problem is caused by the different regulatory approach to financial reporting in the US, which has a system that is much more rules-based due to the litigious nature of its stock markets and a different legal framework for listed companies. Nevertheless, in 2007 the SEC withdrew, for non-US companies registered
in the US and reporting under IFRS Standards, the requirement to reconcile their financial statements with US GAAP, a considerable benefit for foreign companies listing shares on the US markets.
The IASB and the FASB have made some progress on convergence since
they signed a Memorandum of Understanding in 2006, although further convergence projects look unlikely.
The EU and IFRS
As part of the drive to have a single market within the EU, the EU introduced the IAS Regulation in 2002 and it came into force in 2005. All companies with securities traded on an EU-regulated market must follow IFRS Standards (following formal adoption into EU law) in their group accounts.
Member States may also require, permit or bar other companies from using IFRS Standards in their group or individual accounts and practice varies across member states, often depending on issues around tax or the legal basis for dividend payments.
Before any EU company can apply a standard produced by the IASB, it must first be legally endorsed for use in the EU, a formal mechanism in which the European Commission’s Accounting Regulatory Committee (ARC) is advised by the European Financial Reporting Advisory Board (EFRAG). With one minor exception, all IFRS Standards have been adopted for use in the EU.
The UK and IFRS Standarda
In the UK, as well as IFRS Standards applying to fully listed companies as required through the EU IAS Regulation, the Alternative Investment Market (AIM) has required IFRS Standards to be applied in group accounts since 2007.
Companies which are not listed have the option to report either under IFRS Standards or under UK GAAP.
The FRC updates UK GAAP to reflect changes in IFRS Standards, but this is usually only every three years, to give a more stable regime. Although company law has some restrictions, UK companies have considerable choice in whether to follow IFRS Standards or UK GAAP and, within UK GAAP, whether to follow a reduced disclosure regime.
Benefits of having one set of global standards
Improve comparability of financial statements for investors who wish to invest across the world.
Improve the standard of financial reporting worldwide where international standards aim to be high quality.
Provide easier access to capital markets and enhanced globalisation of business and investment.
Give a common global accounting framework based on a flexible, principles-based approach.
Reduce training costs for accountants and analysts.
Reduce costs for multinational companies as only one global reporting standard and so there is no need to reconcile local GAAPs to IFRS Standards
Drawbacks of having one set of standards
◆ One size does not fit all, particularly where countries have different histories of financial reporting.
Cost/benefit rules suitable for the biggest companies may not be suitable for the smallest.
Local practices continue to operate because of the flexibility of IFRS Standards, so full convergence to an international norm is not achieved.
There is still scope to deviate from IFRS Standards (although only where the financial statements would otherwise be misleading to users), which means there can never be complete harmonisation anyway.
The effects of convergence are not just accounting related, for example the SEC in the US is concerned that the adoption of IFRS Standards will mean an overhaul of their overall regulatory package.