IFRS refers to International Financial Reporting Standards which are applied while preparing the Balance Sheet and other Profitability Statements of a Company and are developed by the IASB. These have already been applied in more than a 100 Countries and would soon be used across the Globe
Need for IFRS
Different Countries employ different Accounting Standards while computing the Profits of a Company. It may happen that if the Profits are computed as per US Accounting Laws the Profits are $ 100 Billion but when the same Profits are computed using the UK Accounting Laws, the Profits may turn out to be say $ 50 Billion and when computed as per the Indian Accounting Laws, it may turn out to be $200 Billion (Hypothetical Figures).
Profits computed as per different accounting laws of different countries always yield different figures. So as to remove this discrepancy in Accounting across the Globe, Countries world over decided to apply uniform standards of accounting so as to arrive at uniform profits across the Globe.
It is expected that IFRS adoption worldwide will be beneficial to investors and other users of financial statements, by Reducing the Costs of Comparing alternative Investments and Increasing the Quality of Information. The Companies are also expected to benefit, as investors will be more willing to provide financing.
Structure of IFRS
IFRS are principal based set of standards in the sense that they establish broad rules as well as dictating specific treatments. IFRS comprise of the following:-
- International Financial Reporting Standards (IFRS) issued after 2001
- International Accounting Standards (IAS) issued before 2001
- Standards Interpretation Committee (SIC) – issued before 2001
- Conceptual Framework for Financial Reporting (2010)
Benefits of IFRS
There are many benefits of implementing IFRS which can be broadly divided into 3 main parts – Economy, Investors and the Industry.
Benefits to the Economy
As the market expands globally, the need for a global standard is also increasing. Implementation of IFRS benefits the economy by increasing the growth of its International Business. It facilitates the maintenance of orderly and efficient capital markets and also helps to increase the capital formation and thereby economic growth.
Benefits to the Investors
Investors who are willing to invest abroad want information which is more relevant, reliable, timely and comparable across various jurisdictions. Financial statements prepared using a common set of accounting standards help investors better understand the investment opportunities as opposed to financial statements prepared using a different set of national accounting standards.
For better understanding of financial statements, global investors have to incur more costs in terms of the time and efforts to convert the financial statements so that they can confidently compare opportunities. Investor’s confidence would be strong if the accounting standards used are globally accepted. Convergence with IFRS contributes to investors understanding and confidence in high quality financial statements.
Benefits to the Industry
A major push towards implementation of IFRS has been coming from the Industry. The reason for the same is that the Industry would be able to raise capital from foreign markets at a lower cost if it can create confidence in the minds of the foreign investor that their financial statements comply with globally accepted accounting standards.
With diversity in accounting standards from country to country, enterprises which operate in different countries face a multitude of accounting requirements prevailing in different countries. The burden of financial reporting is lessened with convergence of accounting standards because it simplifies the process of preparing the individual and group financial statements and thereby reduces the cost of preparing the financial statements.
Recommended Read: Role of Internal Auditors in Transition to IFRS
Why did IFRS take so much time to get implemented?
Changing the Accounting Laws is not as easy task. It takes ample time, money and efforts for framing new laws and applying the same as a result of which Countries were not in favour of IFRS earlier.
But with the advent of Globalisation, the whole scenario has changed. Many companies are interested in Investing in Foreign Countries or in Raising Capital from Foreign Countries but are hindered by the fact that Accounting Laws in the home country and the foreign country differ significantly as a result of which they are unable to transact. The only option left for the company is to restate its accounts as per laws of the Foreign Country but this in itself is a very time and money consuming effort.
So as encourage free trade of money so that Companies can Invest/Raise money from other Countries, the whole world has now started the process of Adoption/Convergence with IFRS.
All Countries in the European Union have already implemented IFRS from 2005 and the whole world is expected to adhere with IFRS norms. The timeline for implementation of IFRS in various countries has been uploaded here – http://www.ifrs.org/Use+around+the+world/Use+around+the+world.htm
The following Video published by Deloitte shares more information on IFRS