The recent trend of globalization has had an impact on the accounting and reporting systems. To take into account the rapid changes in the environment the International Accounting Standard Board (IASB) are making International financial reporting standards (IFRS) easier to apply and standardized for all companies to use no matter where they are in the world. There are a huge number of companies around the world who have adopted IFRS while there are still many who are considering adopting it in near the future. IFRS is now being recommended on many stock exchanges as well including markets revolving around European Union, Zurich, Tokyo and Hong Kong. US Securities and Exchange Commission is also actively being involved in planning the adoption of IFRS after US GAAP faced heavy criticism. (Stenka R, 2007)
Adoption of IFRS is not just a change in accounting and reporting systems but instead it has a widespread effect. Europe initially used domestic standards to be consistent with their environment but adopted IFRS in 2005. Though when IFRS was adopted in Europe it raised many questions particularly in the public sector and took the form of a controversial debate. Before adoption of IFRS investors’ reaction was a thing of high concern for the authorities. This is because a major change, without a positive feedback would be a major failure. Hence important consideration was given towards high quality of financial reporting. When the market was examined and researched it was found that the investors’ showed positive feedback due to the benefits of IFRS i.e. mainly for the convergence of information, making it easier to compare results among different companies. (Armstrong Christopher, 2008)
The investors’ readiness in accepting IFRS is also linked to the organizations they belong to and on how the information systems of those organizations are before the adoption of IFRS. Better the system, more comfortable the organizations and the associated investors are towards IFRS adoption along with those countries which have very stringent legal or regulatory systems. (Armstrong Christopher, 2008)
European Community in 2005 made IFRS adoption compulsory for all of the listed companies. This requirement pertained to not just listing in the stock exchange but also for companies trading in the region for their consolidated group financial statements. The main aim was directed towards improving the efficiency and cost effectiveness of the working of the capital markets. Increase of transparency and comparability of the financial reporting was also another feature attained upon proper application of IFRS. (Sellhorn Thorsten, Gassen Joachim, 2006)
In 2003 US GAAP and IFRS had been adopted voluntarily by some big organizations. Later, upon IFRS becoming a regulated application for group companies suddenly had an upsurge in cost for running both systems in parallel. Therefore companies were compelled to revert to only one accounting convention. While assessing the adoption of IFRS the main area of focus while debating on the effects of IFRS adoption were the positive effects it had on providing quality information to the users of the financial statements. Moreover IFRS contributed towards better governance as it promoted at resolving conflicts between the different accounting and reporting systems around the world making reporting more transparent. (Sellhorn Thorsten, Gassen Joachim, 2006)
Other benefits derived upon voluntary adoption of IFRS in Germany were the international exposure and dispersion of information. Companies having exposure in foreign capital markets showed appropriate data under IFRS, enabling investors to understand thereby making trading all the more easier. It was further observed that besides some big organizations who adopted IFRS voluntarily, some new and young firms took a similar course leading to persistent and conservative earnings. Moreover their earnings could not be predicted as compared to the non IFRS firms. Though the share price volatility of firms compliant with IFRS are more due to information asymmetry i.e. no information is hidden on the face of the financial statements. (Sellhorn Thorsten, Gassen Joachim, 2006)
It’s been a while US is considering and planning its roadmap for converting its US GAAP system to IFRS and its still questionable whether ever this plan will be fruitful. They are now feeling pressured by other big countries as Canada has adopted IFRS. US Securities and Exchange Commission has provided the date of adoption as 2014, but still its not that clear what their plan is. (Epstain Jay)
The impact on adopting IFRS, but benefits in reality, associated with a common financial accounting and reporting systems is becoming more and clearer as the internationalization is increasing and is important to foster even better international business relationships. One cannot simply disregard it as business is becoming more refined. Thus at first IFRS adoption was never a criteria, but currently it’s otherwise. (Epstain Jay)
The long term reservation of US toward adopting IFRS is due to their belief that US GAAP is better in quality than the IFRS. These reservations were felt greatly by the old IASC, which converted itself to IASB, however the body improved the qualities of IFRS to great extent and continued to develop new standards to deal with current market scenario. Though the growing complexity of the business system and the capital markets have made the information needs impossible to be satisfied by just financial statements. That’s why management information need is highly felt too by IFRS, yet again a feature needed to be resolved to transmission from US GAAP to IFRS easier. (Epstain Jay)
The purpose of accounting is a way to report operational and financial activities of business. With the financiers and investors constantly searching for fair and accurate information, their concerns were met when IFRS was applied. As a result a pre conceived notion was developed of financial reporting being accurately prepared as again and again, IFRS standards proved that the economic positions of the entities were being fairly reported. (Epstain Jay)
This IFRS adoption can in future lead to better liquid markets as the information being available is more reliable and accurate. Investors’ preferences are noted by their willingness to invest in companies reporting on IFRS as compared to GAAP. Another problem faced in companies with respective GAAP is to need to learn and effectively understand GAAP before actively engaging with that company. This barrier has been resolved by IFRS thereby easing the capital flow in different countries. (Epstain Jay)
Impact of IFRS on Sarbanes Oxlay has been rather controversial. There was growing debate on the effects of IFRS on Sarbanes Oxley control particularly in US. Some people carried the notion that IFRS may have deep impacts on Sarbanes Oxley or conflict with Sarbanes Oxley resulting in the need to make many changes. Such beliefs were proved baseless when minimal changes, if any, were to be made Sarbanes Oxley in Europe. (Kim Jim, 2008)
The change of accounting and reporting systems to IFRS had an immense impact on organizations’ IT systems as well. These impacts were due to the changes in the existing accounting conventions as focus had to be directed towards accounting, tax and reporting requirements. This lead to drastic reconfiguration and remapping of the current IT systems. The change is not in just directed to one area of the system since it includes how data is being captured, processed and reported to comply with the IFRS rationales. There are some countries which are offering free services to countries which are striving to settle the differences or revamp their IT processes hence increasing business opportunities for companies. (KPMG, 2009)
Such changes do occur on a large scale with the adoption of IFRS in the country’s economy. Better systems can be developed if the business changes are analyzed and their effects on information technology changes are traced. The extent of IFRS effect on IT systems depends on the size of the entity and the segment of industry. New demands such as presentation or new disclosures requirements will affect the system as well since more fields for reporting will be present. Due to this, additional reporting requirements section of an entity’s system i.e. chart of accounts may change. (KPMG, 2009)
Many companies which are adopting or have adopted IFRS face the problem of whether to leave the earlier system they had in place or to use it in parallel with the new system. If they want to use their old accounting system with the new IFRS based system they need to develop modules necessary to make the reconciliations, adding to the cost. Though practically, as more and more companies resort to IFRS, old systems are abandoned and only the new system based on IFRS is used. (KPMG, 2009)
Another area which is impacted by the adoption of the IFRS is people; those who are using IFRS to make the financial statements and those who are using such financial reports. Educating those people who are the end users of the information generated by the use of IFRS is very critical and becoming more and more important for the impact of the IFRS. It is witnessed that around the globe many companies have made IFRS as the part of their learning and training sessions for their staffs on a continuous basis. The importance stretches to not just the staff of the finance department but everyone directly connected to the business to enable the people to make sound decisions. As a result of this significant change a major impact on their initial year’s costs is noticed (Bichut Dominique, 2005). Also the demand for staff educated with IFRS standards increase resulting in high initial pay to such qualified personnel until the supply is in excess.
The globalization of the world has raised the need for the world’s information to be converged in a way to make people understand, invest and trade with each other without difficulty. The embracing of IFRS by many nations has proved beneficial and so there are many in the pipeline working on the road map to implement IFRS. The major impact of this step in the accounting area is on the investor’s power to have more information in a clearer and reliable fashion. This clarity and transparency has widely affected the volatility of the capital markets of the relative organizations. Though companies have managed to lower transactional costs and remove barriers but they are required bear huge initial costs with respect to revamping their IT systems as well as training of their personnel. Hence no doubt IFRS has gained popularity with its positive impact but the world still remains divided since considering every country’s market scenario seems a bit of a daunting task.
Works Cited
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<http://bpmmag.net/mag/bpm_article_nwarcarticle_14493/>
