What after the implementation of IFRS? Manager 1: IFRS is only the first step towards the change that the SEC is trying to bring in. Firstly it is going to take a couple of years before these standards become consistent. Only then will we start seeing the results of the change in terms of highly comparable financial reporting. It is going to take time before we reach the level of global comparability of financial reporting.
Manager 2: Well, the implementation of IFRS should bring in a lot of positive changes to the global economy. The implementation of IFRS will lead to more consistency in the preparation of financial reports and thus lead to better global comparability for the financial records.
Analysis: The transition to IFRS is definitely not going to be easy. There are going to be many challenges that companies are going to face. Although the implementation of IFRS is expected to be completed by 2011 in most of the countries, it is expected to take much longer than that. This is because the practical challenges are going to be many more than those that have been anticipated by the experts. Even once the IFRS has been implemented in most of the countries; it is going to be long before we actually see common global financial reporting systems in place. Companies will need to spend couple of years before they see the results of IFRS actually coming in, and a lot of effort is going to be needed for the entire transition to take place.
Accounting standards have seen a lot of changes since the 19th century. Initially there was not much clarity of the accounting standards. Companies were following their own accounting procedure and there were no set rules that were being followed by companies while maintaining their financial record.
Towards the latter half of the 20th century, a need was felt to incorporate some accounting standards that would be common across organizations. Especially after the great depression, a need for a common set of rules for accounting was felt, to ensure comparability and consistency. The basic objective of these rules was to avoid any variations in the way different accounting features were treated by different organizations. A lot of committees like IASC were created and steps were taken to ensure consistency in the entire process of generating accounting standards.
In the 21st century, the IASC was restructured and the International Accounting Standards Board (IASB) was established. During the 21st century, due to the growing globalization, a need was felt for common accounting standards across the globe. Thus, the IFRS was developed by IASB (International Accounting Standards Board) in 2005. 25 member states of the European Union together decided to adopt these common set of financial reporting standards called IFRS. The objective if IFRS was to further standardize the accounting rules followed across the globe. With multinational companies having operations across the globe, it has become important to have common accounting rules that are followed across the globe. Without a proper international accounting standard in place, countries have developed their own different standards of accounting like rules-based, principles-based, tax-oriented and business-oriented. ( Christopher Nobes, 2004)
IFRS not only helped enhance the comparability across the globe, but also led to consistency and transparency in the preparation of financial reports. The adoption of the IFRS (International Financial Reporting Standards) is widespread; more than 12000 companies in almost one hundred nations have adopted it, including the European Union, Australia, Malaysia, Pakistan, India, Russia, Hong Kong, Singapore and Turkey.
There has been a continuous debate about the transition from GAAP (Generally Accepted Accounting Principles) to the IFRS (International Financial Reporting Standards). Both standards have their own advantages and disadvantages.
One major difference between U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) are their differing foundations. GAAP is rule-based whereas IFRS is principles-based. IFRS being a principle based standard is much more flexible than GAAP and gives more scope for different interpretations. While the differences between IFRS and GAAP are reducing, there still are significant differences between the two. While the IFRS has been developed by the IASB (International Accounting Standards Board), the US GAAP has been developed by the Financial accounting Standards Board (FASB). While GAAP allows the use of Last in First out (LIFO) method for inventory costing, IFRS does not. While defining the rules for revenue recognition, IFRS is less detailed than the GAAP. IFRS does not allow cure of debt violations after the end of the year. Also, some of the financial instruments which fell under the category of equity in GAAP, now fall in the category of debt as per the IFRS. There are a lot more such differences between GAAP and IFRS.
GAAP helps maintain creditability with stakeholders and creditors. It also ensures that the financial reports show the true financial position of the company. The Generally accepted accounting principles are varied across nations. However, they are based on basic principles like the principle of relevance, principle of regularity, principle of continuity, principle of consistency, principle of sincerity etc.
IFRS however has a lot of advantages over the GAAP. The biggest advantage is the fact that IFRS will help develop international accounting standards. This would thus provide consistency and transparency in preparing the financial records. It would also ensure better comparability across organizations across the globe. IFRS can also help decreases the cost of capital especially for companies looking to raise capital abroad. IFRS would bring lot of advantages to multinational companies. Companies with subsidiaries in multiple countries can use the same accounting language across all countries. With the IFRS, there is no need to develop and maintain national standards. With the IFRS coming into place, cross border acquisitions will become easier with the IFRS standards being the same across the globe. Public in any part of the globe can understand the financial statements of overseas companies, suppliers, customers etc.
A worldwide consensus has been building for many years on the need for high-quality global accounting standards that would better serve investors and facilitate more efficient allocation of capital. There has thus been a shift away from the local financial reporting standards and the world is moving towards global accounting standards to ensure comparability between organizations across the globe. Although the conversion from GAAP to IFRS may take some time to get used to, there are several reasons that this change will eventually benefit company's worldwide.
As it is seen, it is not just a philosophical difference between a rules-based approach and a principles-based approach that marks the differences between the two systems. The systems differ conceptually on a number of points and can significantly affect an entity's reported results. The change from GAAP to IFRS thus involves a lot of challenges. This change would require a complete transformation by the company, as there are a lot of differences between GAAP and IFRS. Implementing IFRS brings the need for change in the format of accounts, different accounting policies and more extensive disclosure requirements. In many EU countries, technical differences between local generally accepted accounting principles (GAAP) and IFRS are numerous, and the costly and resource-consuming conversion process could last up to 24 months. This is the reason why a lot of companies in the US are also resisting the transition to IFRS. The transition to IFRS is not only going to be very challenging and time-consuming, but will also be very costly for the companies. Companies would need to hire external consultants and financial advisors specializing in IFRS, to help them see a smooth transition from GAAP to IFRS. IFRS will completely change the way companies do financial reporting and thus would lead to a complete transformation for the companies.
The change to IFRS is going to happen and is completely unavoidable. Companies thus must prepare themselves for the change to IFRS. Although the conversion time is dependent on a lot of factors, it is said that the estimated conversion time from GAAP to IFRS is estimated to be approx 2 years. All companies in the US are expected to shift to US by 2014.
The transition from GAAP to IFRS is going to be quite a challenge for companies. In order to implement this change, it is important for the company to put down a proper action plan for the use of IFRS. A proper strategy must be developed by the company to ensure smooth conversion from GAAP to IFRS.
IT is also expected to play a very big role in the conversion process from GAAP to IFRS. There would also be a need to upgrade the technology in order to transfer from GAAP to IFRS. IT systems help connect all the departments and systems in the organization together. Therefore, in order to shift to the IFRS system, it would be very important to have the right IT systems in place in the organization. Companies must not take this lightly and must prepare themselves for the challenges that lay ahead. Companies believe that the IFRS would only have an impact on the way financial reporting is done. They don't recognize the impact it would have on other departments especially at the technology front.
Companies must focus on knowledge transfer and training of their employees to ensure a smooth transition from GAAP to IFRS. Knowledge transfer from external advisors and internal specialists to other employees would need to be continued till the conversion process is over. Training must also be done for the internal staff to ensure that they have properly understood the IFRS guidance. A detailed training must be done especially for the finance department, as this change in accounting standards would lead to drastic changes in the way financial statements are made.
Companies thus need to start work towards the transition process. There is no way for companies to define the amount of time and effort that the conversion process will take. The extent of impact and the change would vary from company to company and sector to sector. The extent of change would also depend on the size of the organization. Before the companies start the conversion process, they must understand the kind of changes IFRS brings along with it. Firstly the companies need to conduct a diagnostic review to understand the kind of impact IFRS will have on them. This would give them an understanding of the kind of changes that would be required and the amount of time these changes would take. (Hennie van Greuning, Marius Koen, 2009).
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