International Financial Reporting Standards
The Financial Accounting Standards Board (FASB) in the United States oversees the operations
and activities of the US Generally Accepted Accounting Principles. Discuss the convergence
efforts, the International Financial Reporting Standards (IFRS) benefits, shortcomings and the challenges faced in its implementation.
Accounting is largely shaped by political and economical factors. Worldwide integration of political and
economical factors makes the integration of the financial accounting reporting standards as well as
practice certainly inevitable. However, most markets due to political pressure remain locally focused at
least for the foreseeable future despite the spirited efforts by the IASB to converge all accounting
standards globally. Also there are no clear standards or guidelines to assess the real advantages and
shortcomings of the uniform standards at national levels not even internationally. The notion that was
initially propagated by the IASB that the uniform standards would eventually lead to uniform financial
reporting globally seems to have been overly naïve (Herz & Petrone, 2005). The International
Accounting Standards also referred to as the IAS is a global body that formulates accounting
policies, regulates and oversees the implementation of accounting standards in countries that
have adopted the standards throughout the world and it operates through the International
Accounting Standards Board (IASB). The International Financial Reporting and Interpretations
Committee interprets the provisions of IAS standards across the globe. The Financial Accounting
Standards Board (FASB) in the United States oversees the operations and activities of the US
Generally Accepted Accounting Principles. This paper discusses the convergence efforts, the
IFRS benefits, shortcomings and the challenges faced in its implementation.
The need for a single or uniform global set of recognized accounting standards for financial
reports and statements has never been felt like in the current age of digital technology where
millions of transactions are carried out globally between different nations and where the
integration of accounting systems would result in a reduction in the total cost of international
transactions and communication. Fiber-optic cables that reduce the cost of information
transmission together with the internet present a revolutionary trend in international cost
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management where substantial amounts of transactions have to be processed and presented in
different formats to fulfill the legal demands of each nation especially where convergence is yet
to be fully appreciated.
Development of IFRS
The IAS was established in 1960 and stated its operations by rolling out its first accounting
standards in 1966 starting with IAS 1 till IAS 41 before the end 2000. The increased investment
in foreign countries and the ultimate development, growth and expansion of the global
transnational corporations in the last four decades has been phenomenal notwithstanding the role
of prospective international investors who due to increased awareness and transparency in
accounting information have aggressively competed for high profits by embracing the IFRS to
promote accountability and transparency in financial reporting standards. The IFRS has strove to
lower financial costs in reporting standards by making comparisons more accurate, reliable and
conveniently affordable due to uniformity (Topazio, 2005).
Objective of IFRS
The major objective of the International Financial Reporting Standards was principally to
introduce a universal financial language across the globe for all companies so as to create a
common and understandable set of accounts that would be comparable globally. The first attempt
to harmonize the International Financial Reporting Standards (IFRS) was made by the European
Union before the concept attracted the attention of the rest of the world (Schipper, 2005). The
International Accounting Standards Board is responsible for developing and implementing the
International Accounting Standards. The IASB was established in April the year 2001 when it
took over from the International Accounting Standards Committee (IASC). The IASB has
continually strove to enhance the relevance of the IFRS by ensuring that the standards reflect
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faithful representation of accounting information in a timely, verifiable and in an understandable
The Convergence & Successes of IFRS
The adoption of the IFRS globally has led to cost reduction in creation of multiple financial
statements for comparisons purposes as one set of accounts in IFRS format is sufficient for all
comparisons needs globally. The quality of account records globally has also improved
considerably since the convergence commenced (Topazio, 2008).
To achieve a full convergence on all issues has not been possible for the IFRS, however IFRS
has managed to converge some of the following major features of accounting with many other
countries in the world;
Consistency of Presentation
The classification and presentation of various items in financial statements should be consistent.
The accounting concepts adopted should be retained from one financial period to the next.
Comparative information for subsequent years of trading are required under IFRS guidelines that
also requires the narrative as well as the descriptive information that is relevant to the material
information on the accounting statements.
IFRS forbids offsetting unless particular standards like the IAS 19 or the deferred tax liabilities
or assets that provide clear definition when to offset the tax transactions.
Materiality and Aggregation
All items of similar material class are literally to be presented separately as defined by the IFRS
guidelines unless they are immaterial and dissimilar.
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Transactions under IFRS are recognized once they have been made and not when cash is paid or
The IFRS has adopted the standard accounting feature that requires financial reports to be
presented as a going concern unless an entity management intends to liquidate, stop business
operations or has no other alternative.
Compliance and Fair Presentation
The IABS through IFRS has implemented guidelines to ensure faithful representation and
compliance of all the accounting requirements as defined by the IFRS framework.
The Importance and Criticism of the IFRS
The convergence of local and international standards in certain parts of the world has been very
National and International Convergence Successes and Shortcomings
As at the commencement of the year 2005, all the listed companies in the European Union were
expected to have fully adopted their consolidated financial statement as per the guidelines of
IFRS. Most of the financial statements are currently fully compliant with the IFRS guidelines
however most investors are still to experience the nature of the IFRS full compliance regarding
yearend adjustments (Ross, 2005).
The major advantage of IFRS is that it has resulted in high quality standard in more than 100
countries where the IFRS has been adopted (Ball, 1995). The disadvantage is that most of the
countries are not fully compliant to IFRS guidelines and it has resulted in some differences in the
quality and standard of financial reporting.
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The FASB (Financial Accounting Standards Board) is responsible for American accounting
standards, policies and development of American Generally Accepted Accounting Principles
also known as GAAP. The FASB first undertook its first step in convergence in 1990 when it
included the international harmonization as one of its primary goals (Ross, 2003). Two major
projects were undertaken during this period. The FASB collaborated with the Canadian Institute
of Chartered Accountants in the development of common standard accounting reporting
standards. The other project involved the collaboration of IASC and FASB in the development of
secondary consortium of IFRS standard setters under similar conceptual frameworks (Herz &
Petrone, 2005). The other countries that were also involved as part of standard were Australia,
United Kingdom together with Canada and New Zealand. Chile was included among the
countries among the standard setters together with other countries from the American Free
Agreement Committee on Issues of Financial reporting Matters together with the members of the
North American Free Trade Agreement (Larson and Street, 2003). The IFRS provided a basis for
harmonization of the IASC and the FASB and for the improvement of the standards quality,
narrowing the differences between the two standards.
The IFRS provided a tool for potential investors, analyst and other interested parties to compare
financial statements easily especially between the IASC standards. In the US, IASC standards
are utilized to assess the standards of securities and also to ensure that the policies are
Key Features of IFRS
To ensure that the IFRS guidelines are carried out professionally and credibly, the IFRS has
adopted the following Characteristics; 1) Independent decision making capabilities 2) High
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Standards of international accounting practices and reporting 3) Adequate due process, staff and
independent oversight (CIMA, 2008).
The Differences and Challenges between the IFRS and FASB
In the US, IFRS has achieved a significant stride however the following differences still remain a
challenge to convergence efforts;
1) The SEC recognizes the LIFO as a valuation concept that is acceptable but the IFRS does not
allow the application of LIFO in inventory costing method.
2) US GAAP does not permit the revaluation of assets but IFRS allows.
3) IFRS applies single-step impairment method to write down except goodwill but US applies
two method concepts that makes write down more likely (Kirk, 2004).
4) IFRS permits under certain conditions, the capitalization of certain development costs.
The major objective of the convergence efforts between FASB (Financial Accounting Standards
Board) and IASC was to improve the comparability of accounting standards especially financial
reporting. The challenges encountered between FASB and IASB is that each country is unique
and convergence efforts start from different places. Achieving a clear commonality where
nothing common exists is a huge challenge to IFRS. International various aspects of cultural
environment, economic, legal as well as other regulatory differences make convergence efforts to
be very difficult.
The other challenge facing the FASB and IASB is that technical differences exist in some
convergence efforts as their agendas differ. The constant threat of interference by political forces
and the existence of an acceptable two tier GAAP accounting concepts in the US make
convergence efforts a little harder.
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The UK Perspective
The UK requires all companies operating within its borders to comply with the provisions of the
IAS when preparing consolidated accounts (FEE, 2006). The benefit of the IFRS provisions in
UK are; improved credibility and financial understanding, facilitating easier movement of
accountants between organizations as the systems used are consistent as IFRS provided a
convergence between the IFRS standards and the local UK accounting standards (Topazio,
2008). The key areas that the IFRS convergence efforts had the greatest effect was in business
combinations, inventories, construction and service management contracts, property, plant or
other fixed assets like equipment and their total borrowing costs the disposal of current and non-
current assets together with the financial presentation of all discontinued operations (Kirk, 2005).
Progress on IFRS is largely limited in Japan concerning the convergence efforts as the law’s in
Japan only recognizes only the Japanese Securities Law & the country’s Commercial Code
(Misawa, 2005). However, the Big bang major accounting reforms that were instituted by the
Japanese Prime Minister Hashimoto in November the year 1996 that were aimed at making the
Japanese market more competitive contributed significantly to the growth of the Japanese
economy (Maki, 1997). The major differences between the Japanese accounting standards and
IFRS were noted in merger accounting, stock option expensing, amortization of goodwill,
accounting in subsidiaries and the treatment of entities that are special (Maki, 1997). The
differences meant additional costs for Japanese companies operating internationally. To ensure
that convergence efforts were acceptable in Japan, all financial instruments were to be valued at
fair value while other securities were measured as described below.
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1) Securities that were specifically held for trading were marked to market while any differences
were reflected on the income statement (Kaneko & Tarca, 2007).
2) Bonds that were to be held till maturity would be shown at the acquired amortization cost
3) Stocks of related companies or subsidiaries were to be shown at cost.
4) Securities that could not be classified in any of the above groups would be labeled as others
and would draw different treatment on the income statement.
5) All derivatives that were specifically held for investment reasons were to be marked to market
while any arising differences would be reflected on the income statement.
The four critical issues in Japanese accounting practice as compared to IFRS are fair value
measurement, business combination, leases and comprehensive income items. The applications
of the four issues have a great impact on the performance and reported position of companies in
The IFRS standards have been designed to;
1) Reflect economic substance of accounting practice more than the legal form.
2) Reflect accurate economic gain or losses in financial statements in a timelier manner.
3) Reflect earnings in a much clearer and informative way.
4) Reduce existing historical European discretion that encourages manipulation of hidden
reserves smoothing of earnings by senior company managers.
Major Gains of IFRS Internationally
The increased transparency that IFRS offers has resulted in increased efficiency between
contracting parties in companies especially between lenders and companies (Tweedie and
Seidenstein, 2005). Timelier loss recognition that is fronted by IFRS triggers earlier debt
violations prompts faster recovery of debts (Ball, 1995). Eventually the cost of debt would
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reduce the cost of capital resulting in meaningful gain to investors or shareholders. IFRS would
also be able to make easier to forecast business earnings from any part of the world making
easier for analysts to improve average forecast accuracy. The report on earnings under IFRS is
more informative however the transactions are more volatile and not easy to forecast. Fair value
accounting like mark to market is applicable to tangible and intangible assets in IFRS and also on
historical costs valuations.
The markets for commodities and other financial instruments have largely increased and are
more liquid than a few years ago resulting in huge electronic databases that contain transactions
and item prices for securities and other derivatives that require uniform systems of classification
and valuation. In addition the methods used to estimate fair values particularly of untraded assets
are becoming more generally acceptable because of IFRS. Examples of such application are in
present values method when utilizing the discounted cash flow in lease accounting. The major
problems that fair value practice has attracted include the large spreads that result of increased
market liquidity which causes high uncertainty in fair value approach which can lead to loss of
confidence in financial statements. Managers can also cause jitters in the market if they trade in
illiquid market as they can influence quoted prices as the managers can manipulate the fair value
estimates. The application and use of fair value in accounting has not been subjected to any
major financial crisis to analyze the scope of its effectiveness.
IFRS Application Challenges
The major reasons why the benefits of single global accounting standards have not been fully felt
is that most markets and politics have remained primarily local and not global. The uniformity in
application of accounting standards have been affected by political factors as all the regulators,
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rating analysts, preparers and enforcers (managers and auditors) are largely influenced by local
national forces. Consequently, a leeway in development and implementation of accounting
concepts is affected by powerful local political and economic factors which influence how
managers, court regulators and auditors implement the IFRS rules. The forces exert significant
influence on financial regulators and reporting practice on IFRS or its convergence efforts.
Tweedie and Seidenstein (2005) the IASB chairman confirmed that the global capital
markets are integrating and the logic of a uniform set of an internationally recognized
accounting standard is clearly evident. The need for a single set of set of IFRS would
certainly be necessary to ensure easy comparability of financial statements when making
allocation of capital to companies across borders. The development and ultimate acceptance
of the IFRS would reduce the requisite compliance costs for multinational companies while
at the same time it would result in improved financial reporting and consistency.
Tweedie and Seidenstein (2005) also confirmed that several elements in international business
environments have contributed negatively to the implementation of the IFRS. Complex
businesses, state of a country’s economic status and the development, dependence on specific
legal policies and political persuasion (Whittington, 2008).
To conclude, the first attempt to harmonize the International Financial Reporting Standards
(IFRS) was made by the European Union and it was highly successful that it attracted more
players in the international market. The concept attracted the attention of the world especially
with the introduction of online sales and marketing. The rapid expansion of global trade has also
been supported by the use of the uniform accounting standards. However, the biggest challenge
to the implementation of the IFRS in other parts of the world especially in the US is largely due
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to the notion that the FASB (US GAAP) has better standards and policies that the IFRS.
Convergence efforts have revealed that large disparities exist in the concepts of inventory
valuation, goodwill and asset valuation (IFRS, n, d). However, the impact of IFRS in
international trade is enormous and cannot be understated. IFRS convergence has the greatest
impact on business combinations, inventories management, construction and service contracts,
property, plant and other fixed assets like equipment and their borrowing costs such as the
disposal of non-current assets together with the presentation of discontinued operations.
Finally, the increased accountability and transparency that IFRS offers has added more
confidence on the investors to depend on the revelations of IFRS compared to local standards.
The efficiency that the convergence between the IFRS and most national standards has also
resulted in better communication systems that make it easy to recognize losses or profits much
earlier than before prompting faster recovery of debts (Ball, 1995). The total cost of debt reduces
the cost of capital when transparent accounting systems are applied effectively resulting in
meaningful gain to both the investors and the other stakeholders. IFRS makes it possible to
forecast business incomes fairly accurately anywhere in the world. IFRS is basically more
informative and easily comparable. Compliance with the IFRS global accounting standards in
most parts of the world has increased the opportunities for prospective investor and even open up
other emerging markets like parts of India and China for most global multinationals companies.
The adoption of the IFRS has directly contributed to the expansion of the US businesses in the
global market and also improved its business relations internationally.
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